South Korea reform bid stung by global turmoil

By Jon Herskovitz - Analysis

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.