[Viewpoint] Time to end our export dependenceThe recent financial crash made clear how sensitive to a crisis a small-scale, open economy largely dependent on foreign countries could be. The origin of the crisis was the United States, but those that actually suffered the most were exporter countries in Asia and Eastern European countries with high foreign debt. The Chinese economy is doing well thanks to the power of domestic consumption. Without the support of domestic demand, the Korean economy will continue to repeat the unstable cycle of rapid rises and falls according to overseas conditions.
Korea has a typical export-dependent economy. In fact, 46 percent of its GDP came from exports in 2008, which was the largest out of the world’s top 20 economies.
There is an aspect of this export-focused growth strategy that is inevitable. Lacking a strong domestic consumption base and the natural resources of many developing countries, expanding exports was the only option left. However, exports are not enough for the Korean economy to rise past $20,000 to $30,000 per capita national income. Domestic consumption must grow as well.
In this respect, it was appropriate for the government to announce “a method to expand the domestic consumption base,” including increased civil consumption, in September. The important thing is to pursue the project from a long-term perspective rather than expect immediate effects. The government has made attempts in the past to overcome obstacles with artificial measures to improve domestic consumption such as stimulus cards when faced with a bad economy. However, these led to side effects that worsened the state of the economy instead, weakening household finances and driving down prices.
A domestic consumption expansion policy will have to be pursued in tandem with measures to quash any increase in household debt in the future. Household credit is nearing 700 trillion won ($606.01 billion). Now that the average household has debt of over 40 million won, it does not appear civil consumption will increase. There are even many households using 20 percent of the family’s total income to pay the interest and principal on their home mortgages.
In addition, the job security and income base of lower-income families will have to be expanded. Income imbalances generally have a negative effect on overall consumption, because the consumption preferences of higher-income classes are much lower than the consumption preferences of lower income classes. The recently announced 2 trillion won microcredit program and the increase in welfare to 27 percent of the budget next year will help expand domestic consumption.
Above all, there is a need to focus on motivating domestic consumption growth. The productivity of the Korean service industry is only half that of its manufacturers. This low standard of service makes it more enticing to spend overseas.
Therefore, we need to establish a growth strategy focusing on education, medicine, tourism and leisure, and most importantly social services, then gradually abolish restraints that have been applied to the manufacturing industry.
Lastly, we need a way to expand the domestic consumption of all of Asia. Even with the rise in China of a domestic consumption-focused economy, the amount of trade between Korea, China and Japan has increased compared to before the crisis. In this respect, a Korea-China-Japan free trade agreement should be actively pursued. The recent efforts by the Japanese government to increase domestic consumption and Asian consumption is one manifestation of this positive trend.
*The writer is the president of the Posco Research Institute.
Translation by the JoongAng Daily staff.
by Kim Joon-han