South Korea reform bid stung by global turmoil

SEOUL (Reuters) - As South Korea tries to douse the fires from global financial turmoil, analysts say the longer term impact could be more serious by blocking reforms Asia's fourth-biggest economy desperately needs to stay competitive.

President Lee Myung-bak came to office in February looking to fundamentally change his export-driven country by modernizing industry, expanding consumption and making the service sector more efficient so South Korea could better stand up to challenges posed by rivals like Japan and China.

But Lee, who frittered away his political honeymoon due to criticism that started with his transition team, has seen his support rate fall faster than any other South Korean leader due to stumbles in leadership, which has delayed his reform agenda.

Analysts said he may stagger through the remainder of his five-year term with his reforms watered down or abandoned if he fails to successfully see the country through the global crisis that has helped push the won currency to lows not seen since the Asian financial crisis more than a decade ago.

"This will have a long-term effect, but the attention now is focused on the short-term and the aftermath of this turmoil," said Park Jong-kyu, senior fellow at the Korea Institute of Finance.

Lee was looking at reforms that would help South Korea keep up with the likes of Japan and Taiwan in key technology industries, while being better positioned to take on China in traditional strongholds such as steel and shipbuilding.

One of Lee's top reforms was to revamp labor rules that would make it easier for companies to hire and fire workers, and cut personnel costs for major employers. Many international firms maintain minimal staffing in South Korea because of its labor laws, which has dented foreign direct investment.

Lee also wants to see South Korea rely less on exports by increasing consumer spending at home. But his plan for tax cuts to help alleviate the problem has yet to be put into law.

"I feel that the implementation of fiscal policy has been slow," said Ma Tie Yin, an economist at DBS Bank in Hong Kong specializing in South Korea.

BEEF FLOP

South Korean economic officials had high hopes that a free trade deal reached last year with the United States would not only boost trade and growth but also raise Korean standards in sectors such as financial services to global levels and help make it more competitive with other regional hubs.

But Lee's support rate fell to 16 percent in July after bungling a U.S. beef import deal, which led to street protests and squelched any plans to push the free trade deal toward ratification for fear of antagonizing an already angry public.

South Korea's parliament has delayed ratifying the trade pact after the uproar over the beef deal. But U.S. Ambassador to South Korea Kathleen Stephens said on Friday she expects Congress to vote on it next year, once South Korea's parliament approves it.

Lee's team has lined up a series of reforms that it would like to implement in the coming months such as lowering corporate income tax rates, privatizing firms such as the Korea Development Bank and changing a 4 percent limit on non-financial companies ownership in commercial banks to something more flexible.

Analysts said the public has grown skeptical of Lee's reforms, feeling he set expectations too high and delivered too little. Even though he is unlikely to face any challenges to his leadership, his effectiveness has already been damaged.

Lee's team has had to revise down growth targets due to the global downturn and abandon public spending projects to stimulate the economy seen as impractical.

In theory Lee, whose support rate has fluctuated at between 25 and 30 percent in recent weeks, should be able to push economic reforms through parliament, controlled by his conservative Grand National Party.

But the government's already watered-down privatization plans look in serious doubt unless it makes significant progress in implementing change by the end of the year, an adviser to the government said this week.

"If this grim economic situation continues until next year, Lee will be politically in danger once again, because his rise to the presidency was based on nothing more than the claim that he would be the best person to improve the economy," Hahm said.

(Additional reporting by Kim Junghyun)