South Korea’s New President Faces Choices on Economy

February 24, 2013, 6:37 p.m. ET

South Korea’s New President Faces Choices on Economy

By EVAN RAMSTAD

SEOUL—When Park Geun-hye, the daughter of the man who led South Korea’s rise out of poverty, is sworn in as president on Monday, she will take control of an economy that is far larger and more important in the world—but that remains shaped by some of the institutions and regulations her father created in the 1960s.

One of the fundamental choices Ms. Park faces is whether to maintain the South Korean government’s enormous influence on the economy, which ranges from running dozens of regulatory agencies to owning about 400 companies, including several of the nation’s biggest banks.

Ms. Park is set to be sworn-in Monday morning before an invited crowd of 70,000 people on the grounds of the National Assembly, where she has been a member and leader of the ruling conservative party since the late 1990s.

Ms. Park, 61 years old, is the first woman to become president of South Korea. Thai Prime Minister Yingluck Shinawatra, the only other woman now leading an Asian nation, will attend Monday’s ceremony.

Since her election in December, Ms. Park has said little about the economy. The most substantial policy proposals announced by aides have been to expand welfare benefits for the elderly.

She appointed the head of the government-related development think tank, Korea Development Institute’s Hyun Oh-seok, as finance minister.

Ms. Park is taking power as expectations for South Korea’s economic growth have fallen to below 3% after rising above 5% in the recovery period from the global downturn of 2008 and 2009.

Meanwhile, an ultralow birthrate and other demographic conditions are working against growth potential. By the end of Ms. Park’s single five-year term in 2018, the size of South Korea’s eligible workforce population will have begun to decline.

The government’s sizable control over the economy formed under the leadership of Ms. Park’s father, Park Chung-hee, who ruled South Korea from 1961 to 1979 before it was a democracy and when it was an impoverished developing nation. He directed scarce resources into industries that became the foundation of its modern export-oriented economy.

The government asserts less authority on the economy now than it did then but more than that seen in other developed nations.

South Korean regulations are far less permissive toward entrepreneurs than in other developed countries and the government is widely perceived as tamping down competition for large conglomerates that dominate most market sectors.

Ms. Park’s actions since the election have sent mixed signals about her beliefs about the government’s role.

In one sign that she believes the government should throttle back its presence on economic matters, she and her aides have declined to set a target for economic growth, as presidents have done from her father up to the departing officeholder Lee Myung-bak.

“Maybe Lee Myung-bak is the last president who has a kind of old-style growth model,” said Kwon Young-sun, an economist at Nomura International in Hong Kong.

If so, he added, Ms. Park’s government would be joining a global trend. “After the 2008 global crisis, so many countries realize the benefit of very high economic growth is concentrated on very small number of people that they have de-emphasized it,” Mr. Kwon said.

However, in a sign that Ms. Park wants government and companies working closely, she returned control of trade matters and treaties to the ministry of industry from the foreign affairs ministry, where it has been for the last 15 years.

One prominent member of the Assembly from Ms. Park’s conservative party, Kim Jong-hoon, the former trade minister who negotiated South Korea’s free-trade pacts with the U.S. and European Union, publicly criticized the move. He said the industry ministry’s focus on manufacturing is out of step with the growing importance and influence of South Korea’s service sector.

The trade ministry shift has also aroused concern among diplomats and the leaders of foreign businesses in South Korea, who have recalled the industry ministry’s record of creating rules that have served as non-tariff barriers to trade.