Roh pursued regulation of Chaebol businesses while offering strong, though not necessarily effective, support for SMEs, a punitive tax policy for the rich and redistributive measures for the lower income class, including pro-union policies and a policy of curbing scholastic competition among ranking secondary schools (which he thought discriminated against students from this income class), as well as a number of initiatives to force dispersion of the government offices, public corporations, and industries over to the countryside and away from the greater capital city region. These policies were the prescription of the ‘progressives’ who argued for regulation of big business, and redistributive tax and budget policies, most of which embodied a rejection of small government. This ‘redistribution’ strategy was constantly criticized and opposed by the ‘conservatives’, consisting of the politicians aligned with the big business groups, the business groups themselves and many independent opinion makers, who argued for an ‘economic-growth first’ strategy.

The irony is that the various symptoms of polarization which Roh’s redistribution-first approach was meant to ameliorate in fact worsened, rather than eased, under his watch, causing widespread discontent and anxiety over the state of the economy. Given the failures of the progressives’ economic policy agenda, perhaps any candidate from GNP could have won the election. But Lee’s landslide victory owed much to the expectations that he had generated among the voters, as the former successful CEO of a major big corporation, Hyundai Construction, that he would restore the growth and dynamism for the economy. His pledge to realize a growth rate of 7 per cent during his five year term was the anchor of these expectations.

The performance of the Lee government in managing the economy in 2008 has been disappointing. It is not so much the failure to deliver a high growth rate per, but more the headstrong and heavy-handed pursuit of high economic growth, including the ill-advised attempt to depreciate the won against the US dollar in order to artificially boost exports as the main growth engine, and other policy bungles. These policies caused serious confusion in the foreign exchange and financial markets and exacerbated the inflationary pressure being fed by the rising prices of oil and natural resources. It had to be abandoned with the growth forecast for the year revised downward to 4 per cent even before the onset of the global financial crisis.

There were other developments which undermined the market and people’s confidence in the ability of Lee to deliver on his promises. The most serious was the political fiasco in pushing the removal of the prohibition on the import of American beef that had been put in place in response to the discovery of a cow infected with BSF (mad cow disease) in the US. This policy reversal was agreed with the US government in April in a manner that appeared to indicate that it was a political gift from President Lee to President Bush, intended to appease the Congressional critics of the Korea-US FTA at the expense of the public health concern for the Korean people. As if to confirm this suspicion, the agreement was reached and announced just one day ahead of the Camp David meeting between the two presidents. Leftist NGOs and some media, who had been unhappy about Lee’s victory, fanned these suspicions so effectively that the mass candle-light protest demonstrations over the subsequent two months came quite close to toppling the government. Lee’s policy team, including the ministers in charge of health and agriculture, were so inept in responding to the attacks and demonstrations that they only exacerbated the situation. A failure of Korea’s representative democracy during the parliamentary transition period contributed to Lee government’s political crisis. The situation began to improve in late June when he issued an apology to the people, replaced some of the ministers, and renegotiated the beef deal with the US.

The global financial crisis, which began to affect the Korean economy in September has now gripped Korea, causing a sharp depreciation of the won against the dollar, The battering the stock market, followed by a serious credit crunch, continued downward adjustment of the growth rate forecast for the economy in 2009 from 4 per cent to 3 per cent, and further to 2 per cent, with the IMF calling for a growth rate of 2.0 per cent at the end of November.

The current crisis has exposed fault lines in the lending practices of the commercial banks toward housing construction projects and for the small and medium construction companies engaged in those projects. Getting wiser over time through trial and error, the government has in recent weeks and months taken a series of measures to recapitalize the banks and restructure the construction industry, in addition to introducing a series of broad measures to stabilize the foreign exchange, financial and capital markets, and to stimulate aggregate demand.

Fortunately, the reform and restructuring measures which were undertaken in the wake of the financial crisis which hit Korea in 1997-1998 has made Korea’s corporate and financial sectors more resilient so that, with those macroeconomic policies and the plumbing operations on the financial sector mentioned above, the Korean economy is likely to avoid sliding further in 2009.

The real challenge facing the Korean government next year is to undertake reform measures that will help enhance the longer-term growth potential of the economy. The current crisis could discourage the government from thinking long-term and pursuing fundamental reforms. However, the current crisis can serve an important catalyst in overcoming the vested interests opposed to reforms and help the government push those reforms with a success. It seems that President Lee has already seen this opportunity and is focused on trying to do just this. His agenda now is the removal of some politically-motivated regulation affecting big businesses and real-estate transactions; across the board tax cuts, including cutting corporate tax, reform of the public corporation sector, including downsizing of many such corporations, taming of the labor unions and the teachers’ union, and as much undoing of the forced balancing of regional development as possible. In addition, he has announced, he is embarking on a vision for low-carbon green growth of the Korean economy as a long-term development strategy, proposing not only to cut carbon emissions so as to become an active participant in the post-2012 climate change regime, but also to create new growth engines out of low-carbon green industries and technologies, in order to realize high growth ambitions for the Korean economy long-term.

All these measures to enhance the fundamentals of the Korean economy will feed back into the prospects for investment and growth in 2009 and beyond, and should help restore growth dynamism. This requires effective policy implementation, and calls for the exercise of better political leadership on the part of President Lee to have his own party rally behind him and to secure the support of the opposition parties for reform efforts. In the final analysis, getting the Korean economy back on track is a political challenge – that of creating the political will to push, through the current economic crisis, the reforms to enhance the growth potential of the economy. The Koreans will be tested on how they handle this challenge in 2009.

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Dr. Soogil Young is President of the National Strategy Institute (NSI), an independent think thank, in Seoul, as well as Chairman of the Korea National Committee for Pacific Economic Cooperation (KOPEC). He has served as President of the Korea Institute for International Economic Policy (KIEP) and Korea’s Ambassador to the OECD.

This is part of the special feature: Reflections on developments in Asia in 2008 and the year ahead