Demonstrators react during a protest outside the National Assembly in Seoul, South Korea, on Saturday, December 14, 2024, after lawmakers passed a motion to impeach South Korean President Yoon Seok-yeol.
Jean Chung/Bloomberg
South Korea has a knack for picking reliable central bank governors.
Since April 2022, Bank of Korea Governor Lee Chang-hyun has been very solid. In August 2021, Syngman Rhee’s predecessor, Lee Ju-yeol, became the first major central bank governor to raise interest rates during the epidemic. As a result, South Korea’s inflation never reached the peak levels seen in the United States and Japan.
From 2014 to 2022, Lee Jae-yong led the Bank of Korea with outstanding capabilities. period.
The flexible operation of one BOK leader after another helped South Korea weather the crises of the 2008 Lehman Brothers bankruptcy, the 2013 “taper tantrum” and the 2020-2021 pandemic. Long before all of this, the Bank of Korea helped South Korea recover from the 1997 Asian financial crisis.
Lee Chang-yong, Governor of the Bank of Korea.
SeongJoon Cho/Bloomberg
President Yoon Seok-yeol then recklessly promulgated martial law. The Dec. 3 stunt continues to shake up South Korean companies in unpredictable ways, including leading to Yoon’s impeachment.
The political chaos Yin created is one of the worst self-inflicted economic wounds in modern history. Or as Moody’s Analytics economist Danny Kim puts it, “South Korea’s chaotic and dramatic political backdrop” has plunged Seoul into chaos. This also puts Syngman Rhee’s Bank of Korea facing a test that policymakers did not expect.
On Wednesday, Lee warned that headwinds caused by Yoon Eun-hye were increasingly affecting Asia’s fourth-largest economy. The Bank of Korea is already considering lowering this year’s gross domestic product.
Yin’s impeachment on December 14 created unprecedented uncertainty. Economic confidence hangs in the balance as constitutional judges weigh how to rule on Yin’s fate over the next 180 days.
That’s not to say Rhee wasn’t trying to find rays of hope. “Volatility in the domestic financial and foreign exchange markets has shown signs of stabilizing after the sharp swings following the declaration of martial law,” Lee said. “While uncertainty remains, the future political timeline is now seen to be clearer.”
Or not. As the next six months come to an end, Seoul will take no steps to boost South Korea’s economic strength. Or even prepare if the coming Trump storm threatens the global financial system.
The bigger problem is that Yoon did almost nothing in his first 954 days in office to increase competitiveness, reduce record household debt, raise average incomes or improve South Korea’s business climate. South Korea has been unable to recover for 31 months.
Unfortunately, Yoon is not the first South Korean leader to suffer from chronic complacency. His predecessor, Moon Jae-in, took office in 2017 and touted a level playing field and a shift to a “trickle-down growth” model to better distribute revenue gains. He barely had any wins on the scoreboard.
Park Geun-hye launched her 2013-2017 presidential term with bold plans to build a more “creative” economy and reduce economic concentration among a handful of family-owned conglomerates, or chaebols. It ended with impeachment and imprisonment.
From 2008 to 2013, Lee Myung-bak also promised to shift the engine from exports to exports and build South Korea into a seventh-largest economy. Apparently, under Lee, neither of these scenarios occurred.
However, the vacuum created by Yin may mean a deeper and longer period of disorientation in recalibrating the dynamics of growth. As China’s rise speeds up Asia’s economic clock, South Korea has no time to waste.
China’s real estate crisis and the resulting deflation have not changed the fact that China’s economy is disrupting the global landscape at a dizzying speed. Or why countries from South Korea to Indonesia are at risk as President-elect Donald Trump returns to the White House.
However, South Korea has been stagnant on policy for nearly two decades. A lot is happening globally, but the fundamental dynamics of the Korean economy remain largely unchanged.
Seoul officials have resented comparisons with Japan over the past 25 years. But as the South Korean government prioritizes conservation over economic reform, risks of Japanification abound. And rely on BOK leaders (as skilled as they are) to save the world.
Syngman Rhee’s team is in more trouble than his predecessor as Yoon’s strategy went awry and dragged down the South Korean economy. How he handles things is an open question. But with politics lost in Seoul, the Bank of Korea has no playbook to follow.
