The author is a former CEO of IBK Investment & Securities and a member of Reset Korea Economic Committee at the JoongAng Ilbo.
Stock markets in the Group of 7 advanced slowly but steadily this year. As of the end of last week, their stock indexes had risen between 1 and 20 percent from year-end levels, averaging about 11 percent. Except for Japan, declines from annual peaks were limited to 1 to 5 percent. Canada, Germany and Britain saw declines of just 1 to 2 percent. Returns were reasonable relative to risks.
Korea’s benchmark Kospi, however, surged from 4,214 at the end of last year to an intraday high of 9,385 on June 19 before plunging to 4,911 on Nov. 6. Even at 5,290 on Thursday, it remained 44 percent below its peak. Although the index was still up 25.5 percent from the end of the year, extreme volatility left many investors complaining that their accounts had been wiped out.
Investors ultimately bear responsibility for their decisions. Yet many blame regulators and securities firms for magnifying their losses. Authorities mishandled issues involving National Pension Service investments and the introduction of leveraged exchange-traded funds tracking individual stocks. Securities firms encouraged unrealistic expectations of endlessly rising prices. Both deserve criticism, particularly when generous industry bonuses contrast sharply with investors’ suffering.
Customer deposits fell from 139 trillion won ($104 billion) in June to 92 trillion won by Nov. 12. Meanwhile, individual investors’ net purchases of foreign stocks reached $5.3 billion in October, their highest monthly level this year. Distrust of domestic equities has become severe. President Lee Jae Myung signaled stock market reforms last month and reiterated the need for capital market changes during a stock exchange visit on Friday.
But regulatory improvements alone cannot stabilize prices. Even direct government intervention through stock purchases has repeatedly failed.
Korea announced unlimited stock purchases in December 1989 and established a 4.86 trillion won market stabilization fund in May 1990. Similar measures were implemented or discussed during the 2003 credit card crisis, the 2008 global financial crisis, Europe’s 2011 debt crisis, the 2019-20 Covid-19 pandemic and the 2022 global interest rate surge. Their impact was all limited.
Japan established stock purchasing organizations in 1964 and 1965 and introduced further support measures between August 1992 and November 1993. Weak economic fundamentals undermined their effectiveness. China restricted selling, suspended initial public offerings and supported share purchases during its 2015 market collapse, but the benefits proved temporary.
These experiences suggest that broader economic reforms are essential. Germany, Brazil and France offer useful examples of governments pursuing structural changes while taking advantage of prevailing economic conditions. Particularly important were politically difficult labor and welfare reforms.
Germany’s center-left Chancellor Gerhard Schröder concluded that economic competitiveness required fundamental changes. His Hartz reforms reduced unemployment benefits for job seekers refusing suitable employment. The unpopular policies contributed to his electoral defeat, but Germany subsequently became Europe’s leading economic performer until recently facing intensified competition from Chinese electric vehicles.
Brazilian President Luiz Inácio Lula da Silva, recently elected to a fourth term, pursued labor and welfare reforms during his 2003 to 2010 presidency. Measures reducing labor costs and welfare burdens improved export competitiveness. His administration also eliminated mandatory union contributions and reduced excessive union structures. Brazil’s annual economic growth averaged 4.1 percent during those years, compared to 2.5 percent between 1995 and 2002. Brazilian stocks rose 1,215 percent in dollar terms.
French President Emmanuel Macron, who took office in May 2017, eased dismissal regulations. Businesses expanded hiring, helping unemployment decline from 10 percent in 2016 to 7.3 percent in 2023. Before recent fiscal difficulties, French equities also attracted considerable attention, second only to Germany’s.
Korea must therefore look beyond stock market regulations. Sustained economic expansion and stronger industrial competitiveness require reforms across the economy, including politically sensitive areas. No sector should be exempt. Only comprehensive structural reform can provide the foundations for lasting economic and stock market stability.
The central lesson is that stock prices cannot remain detached from underlying economic performance. Government intervention may temporarily reassure investors, but lasting confidence depends on businesses generating sustainable profits and maintaining competitiveness. Policymakers should therefore resist treating market reforms as a substitute for the more demanding task of strengthening the economy through structural change.
