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To reach Kospi 5000, Korea must embrace bold reform

Published: 21 Jul. 2025, 00:02

Shin Seong‑ho

The author is anformer CEO of IBK Investment & Securities

Following Korea’s presidential election, optimism surrounding the stock market has noticeably grown, particularly among overseas analysts. Mark Preskett, senior portfolio manager at Morningstar Wealth, projected an annual return of 11 to 12 percent for Korean equities in the next decade. JP Morgan even raised the possibility that the Kospi could reach 5,000 points within two years.

Much of this renewed confidence stems from Korea’s recent push to amend the Commercial Act and promote dividend tax reform. These efforts represent the most significant shift in Korea’s securities regulation since the enactment of the Capital Market Promotion Act in 1973, which helped formalize private bond markets. For corporate leaders, the regulatory changes are not without concern. Yet by curbing controlling shareholders' overreach and enhancing investor protection, the revisions could help address the longstanding “Korea discount” that has kept valuations low.

A screen in Hana Bank's trading room in central Seoul shows the Kospi trading in the morning hours on July 18. [YONHAP]

The global economic outlook lends additional support. With the IMF forecasting growth of 2.8 percent this year and 3.0 percent next year, investors are increasingly inclined to shift assets into equities. Since stock prices tend to reflect expectations about the direction of the economy rather than its current level, this trend could provide upward momentum.

The new administration would do well to seize this moment. Stock market gains should be harnessed to stimulate domestic demand, expand household wealth, and ease corporate financing. But reforms in capital markets alone cannot drive sustainable growth. A more fundamental economic policy shift is required — one that acknowledges the pressures Korean companies now face, including from the recently revised Commercial Act and laws such as the “Yellow Envelope Law.”

Germany under former Chancellor Gerhard Schröder offers a relevant example. From reunification in 1990 until 2003, Germany suffered from sluggish growth, high unemployment and unsustainable welfare spending. Despite being a center-left leader, Schröder launched the Hartz labor market reforms in 2002, which restricted unemployment benefits and penalized job refusal. The measures were deeply unpopular and cost him the next election. Nonetheless, the reforms revived the German economy, and Chancellor Angela Merkel later preserved them.

Once the final phase of Hartz IV was implemented in January 2005, German stock performance began to diverge significantly from that of its European peers. As of June 2025, German stocks have outperformed those in Britain and France by 378 percent and 358 percent, respectively, since early 2005.

Brazil’s first Lula administration also presents a case in point. In 2003, the left-leaning government pursued reforms in labor, taxation, pensions and land policy, along with enhancing the independence of the central bank. Labor reforms focused on reducing nonwage labor costs, bolstering export competitiveness. The number of unions and mandatory dues were cut. Pension reform aimed to eliminate special benefits for civil servants and unify fragmented pension systems. Simpler taxation and selective tax cuts further encouraged productivity. With an independent central bank, monetary policy operated with greater credibility. By September 2010, before Lula left office, Brazil’s stock index had risen 546 percent in local currency and 1,215 percent in dollar terms.

The National Assembly passes a partial amendment to the Commercial Act during a plenary session on July 3. [YONHAP]

France, once dubbed “the sick man of Europe,” underwent dramatic change under President Emmanuel Macron, who took office in May 2017. His administration’s labor reforms eased hiring and firing procedures, reducing burdens on employers. As termination became less risky, firms expanded hiring. The unemployment rate dropped from 10 percent in 2016 to 7.3 percent between 2022 and 2024 — the lowest since 1983. Job quality also improved as firms competed for talent. France’s stock market responded accordingly, rising roughly 50 percent more than Britain's since May 2019, although it still trails Germany’s performance.

The lesson is clear: only reform injects meaningful energy into economic growth and equity markets. Korea’s new government should pursue bold change, drawing on the pragmatic spirit of past progressive administrations like those of Kim Dae-jung and Roh Moo-hyun. It is time to implement a practical, reform-driven model of capitalism.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.