Kospi 5000 must connect to the real economy

The author, a former president of Seoul National University, is the chairman of the Korea Institute for Shared Growth.
Despite increased volatility, the stock market has posted a sharp rise compared to last year. The Kospi broke through the 5,000 mark, escaping a longstanding trading range and raising expectations for asset gains among investors. Rising stock prices also help companies raise funds, making the development welcome. Yet Kospi 5,000 is not only a cause for celebration. It also calls for caution.

Korea's stock market began in 1956 with the launch of the Korea Stock Exchange. At the time, only 12 companies were listed, with a total market capitalization of 15 billion won ($9.8 million). Today, more than 2,600 firms are listed, and market capitalization exceeds 2,500 trillion won. Although simple comparisons are difficult, market capitalization has grown far faster than nominal GDP over the past 70 years. Even so, many have long argued that Korean equities remain undervalued and that the market should expand further.
Why has the Kospi reached 5,000 now? Some point to strong presidential interest and increased purchases by public funds such as pension funds. Yet two structural factors appear more decisive. The first is the expansion of AI investment. As global technology companies pour resources into AI infrastructure, demand for high-performance semiconductors and memory has risen sharply. The competitiveness of Samsung Electronics and SK hynix in this market has drawn attention and helped lead the rally. The second factor is the expectation of improved corporate governance. Revisions to commercial law and capital market regulations have raised hopes of resolving the longstanding "Korea discount," boosting investor sentiment.
For years, Korean companies have been undervalued due to low dividends, a management focus on internal reserves and decision-making structures centered on controlling shareholders. Treasury shares, intended as a tool to enhance shareholder value, have often been used to defend management control. To address this, amendments to the Commercial Act in July and August 2025 expanded directors' fiduciary duties to include all shareholders, mandated cumulative voting for large listed firms and broadened the separate election of audit committee members.
A third amendment in February introduced a rule requiring companies, in principle, to retire treasury shares they acquire. The aim is to curb their use as a control device and to improve shareholder value and capital efficiency. These reforms mark a significant institutional shift toward greater transparency and trust in the capital market.
There are, however, notable risks. Given the cyclical nature of the semiconductor industry, the overall market remains unstable. External shocks, including geopolitical tensions such as U.S. military action involving Iran, could also unsettle markets.
More fundamentally, even as the stock market heats up, the real economy continues to struggle with low growth and widening inequality. Since 2023, annual growth has remained below 2 percent. The gap in business sentiment between large corporations and small- and medium-sized enterprises, as measured by the business survey index, has continued to widen.
When finance grows excessively relative to the real economy, "financialization" occurs, transforming industrial capitalism into financial capitalism. Rising credit trading and leveraged investment in recent markets suggest that asset price increases may be feeding speculative behavior. As economist James Tobin warned, financial markets can take on a "casino-like" character. The late economist Cho Soon similarly cautioned that such trends could lead to an economy driven by speculative gains.

The consequences begin at the individual level and spread into structural problems. When financial returns exceed those from industrial investment, capital shifts toward speculation rather than production. This resembles a farmer ...