South Korea – President Meeting Challenges

Moon Jae-in won an early presidential election held in May on the strength of a platform that included promises to rein in the power of the country’s large family-run corporations (chaebol) and to increase government transparency, issues that assumed great importance for voters in the wake of a scandal that led to the impeachment and removal of President Park Geun-hye. The new leader took office amid a diplomatic crisis created by escalating tensions between North Korea and the US, but Moon has gone full throttle in cracking down on former officials accused of corruption, a campaign that his political opponents claim is guided more by a wish to settle old political scores than by any genuine desire to clean up the government.

On North Korea, Moon has made clear his preference for the restart of talks aimed at achieving a peace treaty between the two Koreas and establishing a process for the denuclearization of the peninsula by 2020, as a first step toward eventual reunification. However, such a strategy will require the agreement of the administration in Washington to tone down its threats of aggression against Pyongyang, as well as the cooperation of political leaders in Beijing.

Moon displayed his diplomatic skill by defusing bilateral tensions with China over the deployment of a US-sponsored missile-defense system in South Korea. However, the Trump administration continues to express scepticism about the 2015 nuclear agreement with Iran, the renunciation of which by the US would send a clear signal to Kim Jong-un that there is little point in pursuing negotiations.

Moon has vowed to use fiscal levers to invigorate the economy, create jobs, and bring about a more equitable distribution of resources. The 2018 budget was approved only after the government made concessions with regard to new state hiring and the income threshold at which increases in the top corporate and personal tax rates will apply, but spending is projected to increase by 7% compared to last year’s initial budget, the biggest rise since 2009, while revenues are forecast to grow by 8%.

Real GDP growth is on track to top 3% for just the second time in six years in 2017, and the government’s stimulus measures and improved relations with China should be sufficient to sustain the pace of expansion near 3% next year. That said, there are numerous downside risks to the forecast, the most obvious being the potential for an escalation of peninsular tensions that sends investors scurrying for the exits.

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