Getting out of low growth
The economic mission for the government next year is once again: “Revive local demand.” Deputy Prime Minister and Finance Minister Choi Kyung-hwan vowed to speed up fiscal spending to stimulate domestic demand. Since the Korean economy is overly reliant on exports, few would argue with the policy direction.
When the private sector runs out of steam, the government’s role often becomes greater. The United States went into unprecedented money printing to pump liquidity into the economy after it was shattered by the Wall Street meltdown in 2008. The U.S. economy, led by the private sector, gained enough strength to grow on its own only this year. If left unattended, the Korean economy, which has been growing at a slow pace for a few years, could sink into a lengthy depression. Few would argue with this simple fact.
But the question is whether the private sector can be stimulated through public-sector spending. Let’s look closer into the fundamental reasons behind sluggish domestic demand. Consumption is weighed down by colossal household debt and demographic factors from the aging of the Korean economy and the country’s low birthrate. Corporate investment is sluggish not just because companies are wary about economic prospects, but also due to a reduction in the trickle-down effect on the real economy. Capital investment no longer helps increase jobs or raise families’ incomes.
As long as consumer and corporate spending remains subdued due to these complicated factors, there may be little hope for a pickup in speed from the current economic pace. Skeptics believe the government’s spending will be of little help to the economy and will just end up denting its fiscal integrity.
When everything looks so gloomy, it’s instructive to go back to basics. Let us go back to several decades ago, when the Korean economy was combating poverty after being devastated by a war. Although at totally different income levels, the factors behind today’s slowdown are actually very similar. At the time, there was no hope for the Korean economy. There was virtually zero improvement in domestic demand. So the government, companies and the people all looked outward. The public and private sectors joined hands and achieved miraculous economic prosperity.
The way out of today’s mess should not be much different. There is no hope if our attention is entirely fixed on domestic demand. Instead of vainly trying to pump up domestic demand, it would be faster to reinforce growth capacity overseas.
What’s puzzling and worrying is the widespread belief that exports and domestic demand are contradictory phenomena - that one grows at the expense of the other. Some even say domestic demand has been killed because the government was too concentrated on exports. Let’s face it: South Korea is a middle-income country. Even with increased incomes, domestic demand cannot be expanded to the levels of the United States and Japan, which have much bigger populations. Because of globalization, the size of local demand will inevitably become smaller and smaller against the global market. The rule of thumb is that scale matters in economy. A relatively small economy cannot rely on domestic demand to compete in the global economy. It is why “Revive local demand” won’t actually save the economy and speed up growth. The more realistic solution would be to bolster exports.
To tackle the more fundamental problem of our demographics, we must be more open-minded and aggressive in attracting foreigners to work in Korea and foreign companies to invest. If the economy depends solely on the domestic work force, it cannot expect to survive the coming decades, when there will be a smaller working population due to rapid aging and our low birthrate. Even if Koreans suddenly have more babies thanks to the various government incentives, we must wait another 30 years for those babies to grow up and join the workforce. In the meantime, the country will have to go on investing and investing.
Korea’s living standards and infrastructure are the envy of many foreigners. There are a multitude of capable, intelligent and skillful people in countries like China and Southeast Asia. If they are invited to work and live here, the fruits of their labor will benefit the host country, which will also be earning taxes from them. Foreign workers have been wrongly stigmatized in Korea because they were regarded as cheap labor. But given opportunities and inviting terms, many able workers will be willing to come to Korea and contribute to Korean companies.
External trade always helped South Korea get out of trouble in the past. If we want to shake off the current economic lethargy, we must try to draw up a new foreign strategy.
Translation by the Korea JoongAng Daily staff.
JoongAng Sunday, Dec. 21, Page 31
*The author is an economics professor at the National University of Singapore.
by Shin Jang-sup