A turning point
The South Korean economy experienced major traction for long-lasting growth during its evolution over the last 60 years. The first impetus was the government-driven, export-oriented policy from the early 1960s when economic development was on top of the national agenda. The Korean economy achieved extremely rapid industrialization and the Miracle on the Han River was created as a result.
The second major policy was the stabilization measures in the 1980s to rein in inflation and offset the dangerous side effects of rapid growth. Through the measures, fiscal and financial foundations were strengthened and inflation tamed to put the economy on a stable growth pace.
In the late 1990s, the economy underwent a major corporate and financial restructuring through outside pressure and Korea’s own determination after it went through a liquidity crisis and accepted an international bailout. Reforms and deleveraging helped to reinforce Korea’s economic fundamentals.
The economy today has lost steam partly because of a protracted slowdown in the global economy, but also because we can’t find a new growth engine. It has turned lethargic and is in danger of falling into a lengthy depression. Its growth potential has been pared back and could fall below 2 percent from the current 3.5 percent within the next decade.
But a windfall has arrived just at the right time. South Korea struck a free trade agreement (FTA) with China, one of our closest neighbors and the world’s second largest economy. When we take advantage of the opportunity, the deal could serve as another monumental turning point for our economy.
Just look at the map. Korea looks as if it is at the heart of China, a country with a 1.3 billion population. It does not take an economist to figure out the advantages of our geographic proximity to the Chinese economy. The removal of tariffs will make Korean products and services more accessible in the huge Chinese market. The direct economic benefits from bigger opportunities in the Chinese market are indisputably great. The Korea-China FTA will also bring about many indirect effects. Policy efforts to maximize the indirect benefits could help bring about much-needed traction for our sluggish economy.
South Korea is more advanced than China in the systems infrastructure - the relevant laws and systems - needed to run a market economy. Therefore, our government must broaden its view and turn the entire country into an economic free zone to draw investment by multinational and domestic companies eyeing business in China. The value-added services sectors like health care, medical services, tourism, education and financial fields should be radically deregulated and liberalized to attract China’s middle- and high-income consumers. The farming sector also must prepare an eco-friendly manufacturing system to produce organic farm products and food to meet the rising demands of upper-end Chinese consumers.
However, if our economy becomes over dependent on Chinese demand through these endeavors, our political and economic risks could grow. Some media likened last week’s Asia Pacific Economic Cooperation forum in Beijing as a scene from the feudal days, when a number of countries paid tribute to China. Sino-centrism is deeply rooted in the psyche of the Chinese. China, therefore, could use its ties with neighbors for its own interests. Seoul must pay heed to those political and economic risks while trying to capitalize on the benefits from the Korea-China free trade deal.
The economy also must get ahead of China in technology and quality of goods and services so that Chinese companies - and consumers - prefer Korean brands and services to their own. We must endeavor to keep one foot ahead of China in opening up, liberalization and international relations.
Needless to say, all these economic efforts should be accompanied by balanced and flexible diplomacy with major powers, including the United States and other regional neighbors.
The Chinese economy is a hybrid of state-controlled and capitalist sectors. The inefficiency of state companies and the vulnerable financial sector poses structural dangers. Yet China is eager to recover its past glory and is likely to keep up relatively strong growth using its newfound wealth and resources. China will continue to expand its position in the global economy and wield greater influence in many other areas. We must do our utmost to capitalize on the effects of the FTA deal during these important times and yet use it as leverage to reduce geopolitical risk while trying to minimize political and economic burdens.
Translation by the Korea JoongAng Daily staff JoongAng Ilbo, Nov. 17, Page 32
*The author, a former finance minister, is chairman of the Institute for Global Economics and adviser to the JoongAng Ilbo.
by Sakong Il