Weakness at the core

Korea’s current account surplus has exceeded Japan’s and is expected to reach an all-time record for the year. In October, the surplus reached a record $9.51 billion. The country will likely top this year’s surplus target of $63 billion despite concerns about the strong won weighing down on trade. Overall economic data also has improved. The gross domestic product grew 1.1 percent in the third quarter compared to a year earlier, expanding more than 1 percent for the second consecutive quarter. Consumer price increases have been contained at the mild level of 1.1 percent to 1.2 percent throughout the year. Still, business sentiment remains depressed.

But details of our economic performance tell a slightly different and less cheery story. Exports are seriously polarized. The double-digit growth was attributed to a few sectors: 19.8 percent in automobiles, 22.4 percent in information and telecommunications equipment, and 13.5 percent in electronics. Simply put, exports were led primarily by Samsung Electronics, Hyundai and Kia Motors. Because of their brand power, these companies were unaffected by the global economic slump or volatility in foreign exchange rates.

We shouldn’t rely on the country’s two major brands to power the Korean economy.

A closer look at macroeconomic data exposes a shrinking small and midsize corporate sector and not robust domestic demand. The largest-ever current account surplus is not entirely good news. It shows that imports have not grown as fast as exports because corporate and consumer spending remain subdued. Capital investment by companies contracted 8.2 percent in the first half compared with a year earlier. The gloomiest analysts call the surplus a veiled harbinger of a recession.

Without action, such economic polarization will only become permanent. Government policy makers and legislators must concentrate resources to revitalize domestic demand and boost small and midsize companies. Monetary authorities should seriously consider further easing in order to stimulate demand. The legislature must quickly pass more than a hundred business- and economy-related bills that are mostly aimed at boosting capital investment and supporting the small and midsize corporate sector. Real estate stimulus measures are also needed. Domestic demand and the construction industry must be saved before they completely collapse.

The budget bill must be passed. If it is not approved within the year, the government must be run on provisional budgeting. Because there is no legal base for further expenditures in the provisional budget, the Bank of Korea or the government won’t be able to seek new loans or issue bonds. In a worst case, the government may face a temporary shutdown. Additional fiscal stimuli actions may also have to be studied. Reviving domestic demand is the best solution to ease polarization.