Get serious about services

Song Khee-hong

South Korea has been raking in large surplus in its current-account balance since 1998, the year following a currency crisis that led to an international bailout.

Calculated based on the revised sixth edition of the “Balance of Payments and International Investment Position Manual,” the new data guideline by the International Monetary Fund, South Korea posted a $50 billion surplus in 2012 and a cumulative $200 billion over the past decade in its international account.

Thanks to a sizable international account surplus, the country’s foreign reserves exceeded $340 billion at the end of last year. At the time of the 1997 crisis, the surplus was $20 billion.

Balance of trade in goods - or the difference in monetary value between exports and imports - is the prime driver of the current-account surplus. Korean exports have surged 11 percent annually on average since 2003, sustaining the local economy against the overall global slowdown.

In contrast, the balance of trade in services has been in the black since 2000, raising concerns about a structural deficit. The service account covers transportation, travel, construction, insurance, financial, communications, intellectual property rights, maintenance and repair, processing service, business services and government services sectors.

South Korea posts heavy losses in travel, intellectual property rights and business services, underscoring the need for a systematic plan to promote value-added services.

The deficit-ridden service sector is associated with the country’s growth model. The Korean economy has been driven by manufacturing and exports of industrial products that can be developed from existing models due to the country’s lack of resources and key technologies.

It inevitably has to pay international patent holders handsomely for using their technologies and business services. The United States earned $6 billion from South Korean companies for intellectual property rights in 2012, compared with $1.7 billion in 2002.

In 2006-7, when overseas travel peaked, the travel deficit amounted to half of the country’s trade surplus. Koreans have spent half of the money companies earned throughout the year traveling overseas.

In recent years, the deficits eased as more foreigners came to Korea because of the popularity of Korean TV dramas, music and entertainers. Still, the balance incurs a deficit of $7 billion to $8 billion a year.

The deficit is expected to increase because more Koreans opt to travel and spend overseas due to the strong won, while fewer Japanese tourists visit because of the weak yen.

We tend to take a service deficit for granted and blame foreign exchange rates or other external factors. But advanced countries like the United States, Britain and France all maintain large surpluses in the service sector and rely on the area as a key driver for their economies.

They also work hard to develop and promote services. The United States, which has an unrivaled research and development, education and business service industry, has piled up a service surplus exceeding $1 trillion over the past 10 years.

Britain, which invests heavily to sustain its financial and business service powerhouse status, also rakes in a service surplus balance of more than $70 billion. China also has been stepping up efforts to strengthen services. It recently announced it will invest 40 trillion yuan ($6.6 trillion) on urbanization and modernization of the IT, retail, medical, education and leisure industries.

We, too, must build on our success in manufacturing to promote value-added and high-end services and increase productivity in the sector to improve our current-account balance.

Areas like intellectual property rights take time, but there are many sectors where results can be reaped quickly through concentrated efforts.

We can sell our economic modernization and development model through high-end consulting services to governments and companies of developing nations in Latin America, Southeast Asia and Africa.

When competitiveness is strengthened in airports and other infrastructure areas, the balance in transportation services could sharply improve. Sophisticated programs in tourism and cultural content, and advances in medical and education services, also are promising areas.

Development of the service sector is essential to join the ranks of advanced economies. We had been successful in industrialization through concerted collaboration in the government and corporate sectors. We can build another success in the service sector and a new growth model if we apply our experience.

*The author is a managing partner for Deloitte Consulting Korea.

By Song Khee-hong