Could the Lee Jae-myung government be a turning point for the visibility of MSCI inclusion into developed markets?

Introduction - Another Miss, But the Atmosphere Has Changed

In June 2025, Morgan Stanley Capital International (MSCI), a global index provider, decided not to include South Korea in its Developed Market Index watchlist. This decision is a continuation of the trend where South Korea has been included in emerging market indices since 1992 but has faced multiple failed attempts to enter developed market status. Notably, after being designated as a watchlist country in 2008 and subsequently removed in 2014, Korea has once again fallen short at the threshold for developed market inclusion. However, this outcome carries different implications than past failures. A 'qualitative shift' in market structure and policy environment appears to be taking place. The Lee Jae-myung government has been forcefully pursuing a dual policy of fiscal stimulus for economic revitalization alongside corporate governance reform since its early days in power. These movements align significantly with the conditions outlined by MSCI for inclusion, suggesting new possibilities for South Korea’s entry into the MSCI Developed Market Index. This essay will focus on why South Korea has once again failed to gain inclusion, what structural changes are currently underway, and how the Lee Jae-myung government is approaching the task of achieving developed market status.

Conditions requested by MSCI for South Korea

MSCI has specific quantitative and qualitative criteria for inclusion in advanced country indices. Fundamentally, the main criteria are based on three axes: ① high national income level (GNI per capita) indicating economic maturity, ② sufficient liquidity and market capitalization, and ③ capital market accessibility and regulatory transparency. Among these, Korea already meets the first two criteria, and in terms of actual GDP size, industrial structure, and the level of global corporate ownership, Korea is evaluated to surpass the standards of advanced countries. However, Korea has consistently received low scores in the third criterion. Specifically, a lack of access to the foreign exchange market, instability of the short-selling system, and the opacity of corporate governance have been the biggest constraints. In terms of the foreign exchange market, it has been pointed out that the won is not freely traded in international markets, and access from offshore is also limited, resulting in a lack of foreign exchange hedging tools for global investors. Additionally, regarding the short-selling system, the temporary ban that continued after the COVID-19 pandemic in 2020 was once again fully implemented in 2023, significantly undermining trust in international predictability and regulatory consistency. Regarding corporate governance, issues such as management rights defense through physical division of subsidiaries and utilization of treasury shares, along with inadequate rights for minority shareholders, have been repeatedly mentioned by MSCI. Due to these structural limitations, Korea was again excluded from the list of countries under observation in the June 2025 announcement, delaying actual inclusion in advanced country status until at least after 2027.

The signal flare of structural reform launched by the Lee Jae-myung government

Amid these repeated failures, it is noteworthy that the policy environment itself has changed significantly this time. In particular, the economic policy direction that the Lee Jae-myung government has pursued since its early days in office aims to change the very structure of the market rather than simply stimulate the economy. First, the government is planning to arrange a supplementary budget of 44 trillion won in total over two occasions in the first half of 2025, promoting a strong economic stimulus package. A significant portion of this budget is composed of direct support for household consumption recovery and small businesses and self-employed individuals, aiming to drive the recovery of domestic demand. It is also expected to have a positive impact on the liquidity of the capital market and the overall investment sentiment. More importantly, there is an improvement in corporate governance through the amendment of the Commercial Act. President Lee Jae-myung expressed a strong will to address this by stating shortly after taking office that “the amendment of the Commercial Act is the key to resolving the Korea Discount,” and promised to process the relevant bills in the National Assembly within two to three weeks. The main amendments include expanding the scope of directors' duty of loyalty to shareholders, strengthening the control of major shareholders in the appointment process of audit committee members, and protecting the interests of existing shareholders during physical divisions. This directly connects to the structural reform criteria emphasized by MSCI in terms of protecting minority shareholders, enhancing corporate transparency, and expanding the rights of foreign investors.

Market reactions and institutional significance

The reform signals from the Lee Jae-myung government are also bringing positive reactions in the capital market. In 2025, the KOSPI index surpassed the 2,900 mark, recording its highest level in three years, and the influx of foreign capital is rapidly recovering. Among investors, there is a spreading interpretation that a 'reassessment of the Korean market' is happening, regardless of the inclusion in MSCI. Particularly, if the revisions to the Commercial Act are passed, the implications could be even greater. Strengthening the rights of minority shareholders and increasing transparency in corporate governance serve as a foundation that provides structural trust to foreign investors, beyond short-term stock price increases. This aligns with one of the MSCI inclusion criteria, which is a 'sustainable and consistent policy framework,' establishing the basis for Korea to be reevaluated not just as a simple target for capital inflow, but as an advanced investment destination. However, there are still barriers to overcome. The backlash from the business community regarding the revision of the Commercial Act is considerable, and companies are concerned that the expansion of directors' fiduciary duties may heighten litigation risks and that limitations on the use of treasury stock could undermine management stability. Some business figures argue that improving individual systems through the Capital Markets Act is more realistic, and such discussions may influence the passage and speed of future legislation.

Conclusion - Integration into developed countries occurs on a 'line', not at a 'point'

MSCI inclusion is not a one-time policy or a result obtained through numerical figures. It requires a combination of years of structural reforms, regulatory consistency, and the building of trust among market participants, all of which exist within a continuous process evaluated over time. In this regard, the actions of the Lee Jae-myung administration can be seen as a clear starting point for change. Along with a fiscal stimulus package amounting to 44 trillion won, the political will to tackle the sensitive issue of amending the Commercial Act is laying the groundwork for securing structural trust in Korea's capital market. While there are still remaining challenges such as opening the foreign exchange market, improving the short-selling system, and enhancing information accessibility, the foundation for change is already being laid, making this moment a significant 'turning point' for future MSCI inclusion. MSCI evaluates policy changes that are sustainable and institutionalized rather than short-term regulatory changes. In this flow, the Lee Jae-myung administration is effectively restarting the timeline for achieving structural outcomes toward advanced country inclusion, and if entry as an observed country becomes a reality, the likelihood of the Korean stock market being included in the MSCI developed market index by around 2027 has increased more than ever. This trend will not only serve as an opportunity to change the nature of the Korean stock market but will also mark a new starting point rather than an endpoint for capital market advancement.