The wrong diagnosis

The Korean economy is cooling fast. All the data on the domestic economy — output, consumption and investment — has lost ground. Even as growth is coming to a halt, the government sticks to its course based on the unorthodox theory of income-led growth. If it does not change direction to promote innovation, the economy is headed for doom.

The second-quarter national income released by the Bank of Korea was another red flag. Investment is essential to generate economic growth through increased output and consumption. Facilities investment in the second quarter fell 5.7 percent from the previous three-month period — the biggest quarterly fall in more than two years. Consumption added a mere 0.3 percent, slowing from 4.4 percent in the first quarter. Exports also gained a marginal 0.4 percent in the second quarter.

The gross domestic product in the second quarter grew by a mere 0.6 percent against the previous quarter, further cut from the previous figure of 0.7 percent. Against a year ago, GDP rose by 2.8 percent in the second quarter, suggesting the economy could fail to reach the downgraded target of 2.9 percent for 2018.

The contraction in facilities investment even as Korean companies are richer than ever implies that firms remain doubtful and cannot find business opportunities. Regulations remain the primary stumbling block. The government emphasizes growth, but is slow in removing regulations. Companies cannot be expected to invest when they are under heavy restrictions.

Despite its slogan of income-led growth, income disparities are worsening. The average income of the bottom 20 percent fell by 7.6 percent on year while that of the wealthiest 20 percent gained 10.3 percent. The same decoupling panned out in the first quarter after the minimum wage was raised by 16.4 percent from the beginning of the year. Shopkeepers and small businesses cut hiring due to higher wages, reducing jobs and income for the bottom class and benefitting the richer.

Jang Ha-sung, the president’s policy chief, said he was surprised by the bigger-than-expected 16.4 percent hike in the minimum wage last year. He argued that the economy was doing well with solid recovery in consumption and robust growth in exports.

Treatment cannot be accurate if the diagnosis is wrong. Policymakers must aim to strengthen economic fundamentals and resilience when it is faltering. Companies must be encouraged to invest and expand output so that wages of employers can go up. The government must stop being stubborn and change its steering wheel before it is too late.

JoongAng Ilbo, Sept. 5, Page 30