Abenomics for Korea
If Korea Inc. is doing so well abroad, why isn’t the economy at home getting any better? Many blame stubbornly languid consumption. Others complain that Korea’s economic policies remain too oriented towards exporters and neglect the domestic demand side of the coin. In a 2013 report, the McKinsey Global Institute advised the country to shape a new growth formula that shifts its focus from heavy-industry and manufactured exports to better develop the services and our small and medium sized enterprises.
But I believe the correlation between sluggish domestic demand and exports are misunderstood, which can get in the way of coming up with the right prescription for the economy going forward. We can take our nearest neighbor, Japan, to use as an example. For the last two decades, Japan has been plagued by deflationary domestic demand and near zero growth despite strong exports. It had been fighting the same macroeconomic gap Korea is facing today. Japanese manufacturers fared well overseas with little help from their government. They had to compete on the international market with a strong local currency. Yet exports remained robust.
Why didn’t its domestic demand pick up? Since the Japanese asset bubble burst, companies and households could not afford to spend much due to the deleveraging process, or the paying off of debt. Second, because of the expensive local currency, it was cheaper for Japanese companies to invest and manufacture overseas. Third, the rapid aging of the Japanese population dampened spending. Middle-aged and elderly people don’t spend like the young do.
Many believe Japan finished up its deleveraging and paid up its debts around 2005. When the Japanese were finally able to spend again, the world economy was hit by the global financial crisis of 2008. They were back to austerity. Because of the hardships and fear from the traumatic experience of the last two decades, Japan Inc. and ordinary consumers were scared of spending again. In came Prime Minister Shinzo Abe, who promised to end the vicious deflationary cycle once and for all. He championed a magic prescription, a mixture of every possible means - limitless monetary and fiscal spending together with structural reforms - dubbed “Abenomics.” The main idea behind Abenomics was to spur companies to invest and hire to generate income growth for households. Families with more income would begin to spend and revive Japanese demand. In Korea, Abenomics is better known as a beggar-thy-neighbor monetary policy to artificially boost liquidity and weaken the yen to raise price competitiveness of Japanese exports. But Japan manufacturers have long been used to selling their products overseas despite a strong currency. The yen has weakened on the flush of liquidity as the result of monetary and fiscal stimuli, not from intervention.
So far, few can confidently say whether Abenomics has been a success or failure. But Japanese policymakers have hit the nail on the cause of macroeconomic discrepancies. Without income growth, domestic demand cannot improve. To generate growth in income, companies must increase investment at home and hire more people.
Although the two countries’ economies are not identical, the resemblances are many. Korea has not experienced a catastrophic bursting of asset bubbles as Japan did, but its household debt is at a dangerous level that requires deleveraging. Although the currency remains benign for exports, Korean manufacturers still went outbound for investment. Exports are strong, but any trickle-down effect on the domestic economy is limited. Our society’s aging is proceeding faster than in Japan. Japan’s prescriptions therefore have a chance of working in Korea.
Exporters should not be blamed for doing little to help out on the domestic front. They are too busy trying to survive in the global jungle. It is the government’s policy failure if it cannot cajole them to spend at home. The government must make the domestic environment as attractive as possible for domestic and foreign companies to do business here. If necessary, they must throw in incentives.
It is also wrong for local policymakers to condone a strong won in hopes of boosting domestic spending. The International Monetary Fund often warns that Korea must let the won appreciate more to reflect its large current-account surplus and stimulate domestic demand. But Japan’s domestic consumption was mired in the mud for decades despite a strong yen. Even if a stronger won makes imports cheaper, domestic demand cannot be revived as long as Korean consumers do not have fatter wallets. It would be better to increase money supplies to tame the currency as Japan has done over the last year.
A wrong foreign exchange rate policy could have huge ramifications for the economy. Korea suffered a financial crisis in 1997 because the won strengthened from the mid-1990s. The strong won in mid-2000s also backfired when the world got swept up in the financial crisis of 2008. A volatile currency attracts speculators. The currency must be stable to allow the economy to run smoothly. The large current-account surplus should instead be adjusted by stimulating corporate investment that could help increase imports.
Translation by the Korea JoongAng Daily staff.
JoongAng Sunday, July 6, Page 31
*The author is a professor of economics at the National University of Singapore.
By Shin Jang-sup