[OUTLOOK]Economic solutions found at home

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[OUTLOOK]Economic solutions found at home

Last month, Korea recorded its highest export performance in its history, exceeding $190 billion. Also, over the past five years, the share of Korea’s exports in the world market have been increasing from 2.5 percent. This export performance surprised economists and economic institutes, which have been worried about the competitiveness of the Korean economy. They have repeatedly argued over the past few years that to normalize the Korean economy, businesses’s competitiveness should be improved and labor costs should be lowered.
Of course, it is undeniable that Korean producers of simple goods such as textile and low-priced products are at a disadvantage with China and other low-wage countries in Southeast Asia. But many of these producers have already transferred substantial parts of their production facilities to China and Southeast Asia, where cheap labor is available. This phenomenon is an irreversible and unstoppable trend.
The Korean economy can’t avoid working with other countries in the globalized market. To do so, Korea should concentrate on the production of high value-added goods, and the importance of the service industry should be enhanced. But this deals with production innovation, not the rising labor costs that conventional wisdom says is the problem with Korean businesses’s competitiveness.
Instead of focusing on workers’ wages in connection with global competitiveness, there are other issues that should be addressed to revive Korea’s stagnant economy. The problems lie in weak domestic demand rather than Korea’s competitiveness. If one looks at the recent trend of the Korean economy, production and shipping have been shown to be more or less rising, thanks to strong exports, but spending and investment have been on the decline.
The government had predicted that when the U.S. economy recovers in the latter half of this year, our economy will recover, too, as a result. Although the U.S. economy has grown more than 7 percent in the third quarter of this year, the Korean economy is still unable to overcome the downturn.
The remarkable export expansion, a result of the favorable turn in overseas economic conditions, has hardly affected domestic investment and spending. If the government does not come up with any medium and long-term policies, the Korean economy may face the risk of long-term stagnation.
What is the fundamental cause for the decline in domestic spending and investment demand? The cause for a decline in spending can be found only in the structural factor of income distribution. As much of the middle-class, the major consumers, rapidly collapsed after 1998 and fell into the lower-income classes, their ability to spend has considerably decreased.
Consumer demand, which had been sustained by increased household loans and the reckless issuing of credit cards, could no longer last with the proliferation of bad credit holders, which has exceeded 3.5 million people.
In the face of weak consumer spending, businesses have to postpone making any investments because their return is uncertain. As a consequence, the floating funds of over 400 trillion won have become the source of real estate speculation due to the negative real interest rates.
On Oct. 29, the government announced a heavy taxation policy on property and transfer income taxes to control real estate speculation in Gangnam, southern district of Seoul, without suggesting complementary macroeconomic policies. The property tax may be imposed heavily to raise the equity of taxation and to increase tax revenues, but it is not adequate to control speculation.
Heavy taxation on those who own many houses will be no particular disadvantage to them as long as the demand for housing continues, as it is in Gangnam, because the additional cost to own property will be passed on to tenants in the form of rent increases.
Also, if the anti-speculation measures dealing with transfer income tax are to succeed, problems in the housing market will be inevitable because of fewer real estate transactions. The measures announced recently will end up acting as an obstacle to increasing consumer spending in general.
We need to take a look at Japan for some perspective. Although Japan has continued to yield a trade surplus through increased exports after the real estate bubble burst in the early 1990s, it has suffered long-term stagnation for more than 10 years due to structural problems and dwindling spending and investments.
It’s easy to think that a surprisingly strong export performance will automatically lead to an improvement of the domestic economy even without correcting the distorted economic structure, but that idea will not be helpful in Korea’s economic situation.

* The writer is a former senior presidential secretary for economic affairs. Translation by the JoongAng Daily staff.

by Kim Chong-in
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