[Viewpoint] Changes in Korea's Capital Market and the Korea Discount

Despite the ongoing global crisis caused by the COVID-19 pandemic, South Korea's capital market remains at an all-time high. This elevated level of capital markets is commonly observed not only in South Korea but also in major global countries. This can largely be attributed to two factors. First, the astronomical expansionary monetary policies implemented by individual countries in response to the economic crisis. Second, the development and distribution of COVID-19 vaccines. As a result, partial resumption and expansion of normal economic activities have allowed countries with relative advantages on the supply side to actively expand their production activities. In this context, South Korea has relatively successfully responded to the COVID-19 pandemic, and ironically, the supply-side shocks caused by COVID-19 have created a structure where traditional and new industries push and pull each other, leading to an unexpected export boom.

For a long time, South Korea's capital market has been overshadowed by negative factors known as the "Korea Discount." Hostile relations between North and South Korea, backward corporate governance, and institutional deficiencies in accounting transparency have amplified uncertainties in South Korea's capital market over many years. This has been the reason why the KOSPI Composite Index remained shackled around the 1000 level for over 20 years. The Swiss International Institute for Management Development (IMD) ranked South Korea near the bottom in accounting transparency among 63 countries surveyed, placing it 41st in 2012, 63rd in 2017, and 46th in 2020, reflecting these issues.

Fortunately, notable initial steps to improve the Korea Discount have recently begun. First, changes in the international situation. Although recent international tensions, including the leadership competition between the two major powers (G2), the United States and China, have increased uncertainties between North and South Korea, multifaceted attempts to find solutions through dialogue are also underway. South Korean companies' backward corporate governance is also evolving by adopting ESG (Environmental, Social, and Governance) management as the most important value and evaluation criterion for corporate sustainability. Institutional and legal deficiencies that failed to guarantee accounting transparency are expected to improve gradually with the phased implementation of the revised "Act on External Audit of Stock Companies" (New External Audit Act) by 2024.

Even setting aside the uncertainties in inter-Korean relations that cannot be resolved solely by the efforts of the South Korean government and companies, the steps toward change have begun. If ESG management, which has become a global standard, is developed into a value chain where society and companies coexist and internalized into corporate management, and companies proactively pursue creative destruction innovation that encompasses and integrates traditional and new industries, and if the government and related agencies firmly establish the New External Audit Act without regression as intended in the revision, thereby strengthening accounting transparency of South Korean companies institutionally and legally, South Korea's capital market will break through the long-standing shadow of the Korea Discount and continue long-term growth alongside the national economy.

Choi Guk-hyun, Professor, Department of Business Administration, Chung-Ang University

This content was produced with the assistance of AI translation services.