Looking toward inclusive growth
South Korea up until the early 1990s was one of a few countries that achieved both economic progress and balanced distribution, according to the World Bank report in 1993. But after enduring two major financial crises in 1997 and 2008, the economy shifted gears into a structurally slow-moving and unbalanced income-generating mode. For the past six years, the economy grew 2.95 percent annually on average, below the mid-3-percent potential growth rate. The prolonged slowdown has mass-produced jobless young people and worsened income disparities, endangering social unity. The task to restore the benign cycle of an economy moving at a meaningful pace to generate income and jobs has become imperative.
But external conditions work unfavorably toward that goal. The United States has formally exited from a quantitative easing policy and is gearing up for an interest rate hike. Japan is determined to maintain the weak yen, which has played out as a beggar-thy-neighbor strategy against Korean exporters that directly compete with Japanese rivals in global markets. South Korea’s exports to its biggest market, China, have been tapering off due to a slowing economy and a shift to other importers for key materials.
Income polarization has become a common phenomenon across the world since the global financial crisis in 2008. The theme of “warm capitalism” and “inclusive growth” dominated this year’s World Economic Forum in Davos, Switzerland, as a widening gap between the rich and poor poses danger not only in developed countries, but also in developing parts of the world. South Korea in the mid-1990s recorded 0.281 on the Gini index, which measures the income distribution of a nation’s residents. During the peak of the Asian currency crisis, South Koreans lost jobs en masse when the economy contracted by 6.9 percent. The Gini index rose to 0.32. Distribution slightly improved, but the gap deepened after the Wall Street-triggered financial meltdown in 2008. The middle class shriveled, while lower incomes widened along with the wealth gap.
The two crises taught us that low growth can lead to rises in unemployment and worsen income discrepancies. The economy can only maintain sustainable growth if it runs on both engines of domestic and external demand. Domestic demand must tick in during volatilities on the external front. Demand at home was killed by the sinking of Sewol ferry, which resulted in more than 300 deaths. The economy fell into a silent depression in need of radical action. Deputy Prime Minister for the Economy Choi Kyung-hwan came into office at the right time with the right prescription of aggressive fiscal and monetary stimuli. But for sustainable growth, structural reforms to deleverage household debt exceeding 10 trillion won ($914.5 billion) and public-sector debt of 820 trillion won must accompany it.
At the same time, we need a landscape change in the corporate environment, along with macroeconomic endeavors to shake a lethargic economy. Large companies and smaller enterprises must work together to narrow the gap and share benefits. They must work out ways to improve the sourcing of materials and parts from domestic factory lines. Small and midsize companies must be able to grow up to larger enterprises. Mom-and-pop stores and self-employed businesses should build up their competitiveness to survive on their own. Large companies now mostly pay primary subcontractors on time. But payment to second and third suppliers still arrives late. Improvement in payment delivery and pricing could help boost domestic demand. If payment arrives at the primary subcontractors, it should be shared on time with the second and third suppliers. Such symbiotic capital flow will strengthen manufacturing competitiveness.
South Korea and China are close to striking a free trade agreement. Large and smaller industries must join forces to increase exports to meet the tastes of a gigantic market with 1.3 billion people. On the food science front, small and midsize companies can develop local organic farm produce, and large companies can help exports to China through their sales network.
The local innovation centers the government has been supporting to promote start-ups across the nation also depend on the capacity of innovation by small companies in regional areas. Large companies are reported to have a 757 trillion won surplus. There are many capable venture capital companies in the country. Companies should be encouraged to invest in venture capital enterprises with their cash reserves to help foster start-ups and innovative technologies. Economic activities hinge on that sentiment. Consumer spending also sways on expectations for income growth. Large-scale corporate investment that accompanies risk-taking also moves on instinctual sentiment.
We need to breed a predictable investment environment. The benign cycle of growth and distribution can only run when entrepreneurship, investment will, timely legal actions and administrative competence all function well.
Translation by the Korea JoongAng Daily staff JoongAng Ilbo, Nov. 7, Page 35
*The author is the chairman of the National Commission for Corporate Partnership and
professor emeritus at the Chung-Ang University Graduate School of International Studies.
by Ahn Choong-yong