South Korea's president says economy needs 'major surgery'

President Park Geun-hye delivers a speech at the presidential Blue House in Seoul on Aug 6, 2015.
President Park Geun-hye delivers a speech at the presidential Blue House in Seoul on Aug 6, 2015. PHOTO: REUTERS

SEOUL (REUTERS) - South Korea's president called on Thursday for "major sugery" on the economy, which faces slowing growth and increasing challenges as she approaches the half-way point of her single five-year term.

Park Geun Hye, whose popularity has dipped below 40 per cent, has fallen short on pledges to breathe fresh momentum into Asia's fourth-largest economy and seen her push for labour market reforms and job creation sputter.

"Major surgery across the entire economy is inevitable for us to fundamentally solve chronic and structural problems and make a fresh leap as a major global player," Park said.

South Korea's economy recorded its weakest growth in six years in the second quarter, consumption battered by a deadly outbreak of Middle East Respiratory Sybdrome (Mers) and poor exports, prompting the government to scramble to put together a stimulus package with a supplementary budget.

The economy grew just 0.3 per cent in April-June over the previous quarter, according to the Bank of Korea, the slowest since the first quarter of 2009.

In a 20-minute speech from the presidential Blue House, Park made a plea for support for her reform drive across the labour market, public corporations, education and the financial sector.

"The reform that the government is pursuing is not to benefit any particular group or generation but is a matter of life and death, where the future of all of us and our descendants is at stake," she said.

Park laid out a similar blueprint for structural changes to the economy early in the year, but a joint commission set up to seek a compromise between labour and employers broke down, highlighting the challenge of trying to reform a highly rigid labour market.

South Korea will implement a salary cap this year on older and more experienced employees working for the government and state companies, Park said.

She urged companies to do the same, which she said would free up resources for employers to increase hiring of younger workers and address youth unemployment, which is near a record high.

Park also called for a more merit-based pay system, urged businesses to increase hiring and promised the government will tighten the social safety net by improving unemployment benefits.

She pledged to further deregulate the financial services sector and to restructure the public sector to reduce waste and improve efficiency to the tune of 1 trillion won (S$1.18 billion) in tax savings a year.