How Moon Jae-in Aims to Kick-Start South Korea's Economy

Among the immediate tasks facing South Korea's new President Moon Jae-in: Keeping alive a fragile recovery in Asia's fourth-largest economy.

South Korean exports grew at a faster pace than expected in the first three months of this year after two years of decline. But weighing on the economy is the specter of U.S. protectionism, a declining population, a standoff with its biggest trading partner China and the role many economists say that South Korea's conglomerates have in holding back growth potential.

Mr. Moon's economic policies, though still preliminary, place a greater emphasis on the role of the government in boosting soft domestic demand and reversing high youth unemployment.

Center stage is his pledge to create 810,000 new public-sector jobs over the course of Mr. Moon's single five-year term, in part by hiring more firefighters, policemen and social workers.

"At home and abroad, economic conditions are tough," Mr. Moon said in his inaugural speech Wednesday. "Above all, I will take care of job creation."

To help accomplish that, he has pledged to raise taxes and unleash a $9 billion fiscal stimulus package to spur growth.

This blueprint faces an uncertain fate in the National Assembly, where his ruling Democratic Party falls short of a majority. Both tax increases and additional budget spending would require lawmakers' approval, which would need support from politicians outside his party to succeed.

Citibank said in an analyst report on Wednesday that it was skeptical the Democratic Party could muster the votes needed to approve the stimulus plan.

After decades of rapid growth, largely driven by family-controlled conglomerates and state-backed firms, South Korea has been losing steam. Gross domestic product growth was 2.8% last year and in 2015 after 3.3% growth in 2014. The central bank projects 2.6% growth this year.

The country is squeezed between lower-cost China and a cheaper yen that has made Japanese exports more competitive in sectors including machinery, cars and auto parts.

The large conglomerates, known as chaebols, are no longer creating as many jobs at home as they used to, as they ship jobs overseas in search of lower labor and production costs.

South Korea's youth unemployment rate is about 10%, more than double overall joblessness. The persistently high rate has raised concerns about the health of the economy and led to widespread pessimism among young college graduates about future job prospects. Mr. Moon enjoyed broad support from younger voters.

During his campaign, Mr. Moon also said he would curb corporate misconduct by chaebols and enhance transparency in their corporate governance.

South Korea's economy also faces a demographic headwind, with one of the world's lowest birthrates and oldest populations. South Korean women have an average of 1.2 babies, half of the global average, according to the World Bank, and less than the replacement fertility rate of roughly 2.

Due to those factors, Mr. Moon's "big government" plans are likely to lead to a temporary pickup in growth that could last through next year, but not likely much further beyond that, said Trinh D. Nguyen, a Hong Kong-based economist for Natixis.

"The demographic drag will be difficult to offset, unless South Koreans are willing to pay through sustained fiscal stimulus, which is unlikely given its historically conservative fiscal stance," Mr. Nguyen said.

Another daunting task facing Mr. Moon's government is a more protectionist U.S. under President Donald Trump, which could curb demand for South Korea's products. For one, the Trump administration has begun looking into whether steel imports constitute a U.S. national-security threat, possibly paving the way for new barriers to steel imports from South Korea.

Also weighing on exports, which account for half of Korea's economy, is Beijing's trade retaliation against Seoul's deployment of an advanced U.S. missile-defense system on the peninsula. Mr. Moon had called for delaying the controversial deployment, which China sees as a threat to its security.

"Our economy has just entered a recovery phase recently. A continuous and careful management of the economy is needed more than ever in order to firm up the recovery trend," outgoing Finance Minister Yoo Il-ho said in a message to his deputies on Wednesday.

Write to Kwanwoo Jun at kwanwoo.jun@wsj.com

(END) Dow Jones Newswires

May 10, 2017 08:31 ET (12:31 GMT)