[VIEWPOINT]Short-term cost of long-term gains

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[VIEWPOINT]Short-term cost of long-term gains

With the coming of the New Year, many people’s interest is concentrated on whether the Korean economy will be able to recover its potential growth rate this year. Economic research institutes at home and abroad are offering very positive outlooks on this issue. Most research institutes forecast around a 5-percent growth rate, a little above the potential growth rate. Considering the increased rate of private spending and facility investments that show signs of recovering gradually, this forecast will be sufficiently achievable as long as there is no sudden change in external conditions. But for the Korean economy to become an advanced one within five years, we should not be fascinated by this short-term rosy forecast alone, but should work toward an economic environment that can maintain a 5-percent growth rate constantly for at least five years.
As everyone knows, to achieve growth, the three elements of production, that is, labor, capital and technology, must be invested. But the present Korean economy is in a very unfavorable environment to maintain an annual growth rate of about 5-percent on a long-term basis through the investment of these production elements. First of all, in the case of labor, due to the adoption of the five-day workweek and an aging workforce, the quantitative investment of labor is decreasing rapidly. Although this reduction can be offset by the use of women workers and the extension of the retirement age, these complementary measures will merely help maintain the status quo. Also, it is difficult to promote capital investment because of the gradually decreasing saving rate. According to the analyses of all the research institutes, the growth rate by labor and capital investment will remain at about 3 percent at most, and even this figure will decrease as time passes. Therefore, it can be easily concluded that for the Korean economy to maintain a more than 5-percent growth rate continuously, more than 2-percent growth by technological progress, that is, growth by an increase in productivity, must be accomplished every year. Viewing the growth pattern of the past Korean economy, however, it appears this goal cannot be easily achieved.
To induce growth by a constant increase in productivity, the following problems should be solved. Above all, innovation in productivity should occur in the government and public sector, which shows the lowest productivity of all the economic players in Korea. To do so, along with large-scale privatization, it is necessary to transfer a substantial part of the role the government plays to the private sector. Also, in the formation of government policy, the focus should be put on efficiency and growth rather than equity between classes and regional balance.
Secondly, the structure of the labor market should be changed to one in which productivity can be increased. In all kinds of labor disputes, one of the criteria of wage negotiations should be productivity, and the present pay system based on seniority should shift to something like the wage peak system.
Third, the chronic dual structure of the Korean economy should be improved. In the current Korean economy, some large companies are equipped with world-class productivity, whereas small and medium-sized companies, the service industry and the agricultural area still have low productivity. As long as this dual structure stays, there are limits on improving the productivity of the entire Korean economy.
Lastly, these efforts to improve productivity should spread not only to the economic sector but also to all social sectors, including education.
These efforts may come with painful costs in the short term. In other words, a temporary increase in unemployment and a deterioration in income distribution may take place, and growth without employment may be inevitable for the time being. Here lies the reason I give this bitter counsel, at a juncture when many institutes announce rosy economic forecasts. During a recession like in the past few years, it is difficult to endure such short-term suffering, but in the case of this year when some degree of economic recovery is expected, the main players of the Korean economy will be able to pay the costs for improving productivity, if only they have the will. I pray this year may be the first year of productivity increases in all social areas to maintain the signs of a long-awaited economic recovery in the long term.

* The writer is a sei University. Translation by the JoongAng Daily staff.

by Lee Doo-won

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