Economy needs a facelift

“By the age 50, every man has the face he deserves.”

This observation by George Orwell can also be applied to a country and its economy. The Korean economy today bears the lines of the policies made and the trajectory it has traced. If it has a hollow, fragile and shriveled look, we should take a moment to look back on where we have come from and redesign our future after some reflection. Because past governments have mostly been engrossed with immediate results to generate growth, all the policy ammunition that could aid the economy has already been used.

Consumers are in a financial squeeze, as can be seen in out household savings rate, which is among the world’s lowest. Nor can the average family be encouraged to take out more loans as household debt is already among the world’s highest. Rejuvenating the real estate market to spur spending also seems out of the question: young people have basically given up on owning a home, and Korea’s home values as compared to income level are among the highest in the world. The state of our economy can hardly be described as normal.

According to data on the economy, real estate takes up more than 70 percent of household assets in Korea, compared with 30 percent in the United States and 40 percent in Japan.

Korea’s total liabilities excluding the financial sector are tantamount to 270 percent of gross domestic product, only slightly higher than other Organization for Economic Cooperation and Development (OECD) members. Because government debt is relatively lower than the OECD average, corporate and household debt size is greater than that of most advanced economies.

We cannot expect financial assets to quickly increase to balance out our household asset structure. Financial assets increase with debt as they include liabilities. If debt further expands, the country’s financial stability could be put at risk and it could also jeopardize stable economic growth. What is more possible is to lower the real estate component of household assets.

All’s not well with the corporate sector too. Local manufacturers are generating the lowest operating profits since the financial crisis in the late 1990s. Many cannot even afford to pay interest on their loans with what they earn.

About 30 percent of large companies and 40 percent of smaller enterprises barely manage to pay the interest on their debts. This is the result of delayed restructuring because companies were able to muddle along on low interest rates and debt rollovers. The large number of so-called zombie companies gets in the way of growth for healthier companies and the starting up of new ones. The situation can get pretty messy if interest rates head higher. The U.S. Fed is expected to raise interest rates this year. What would happen to companies and households when lending rates go higher?

The president, the government and ruling party have been saying they will save the economy from the beginning of the year. What exactly do they mean? How will it get saved? If the economy grows at an estimated pace of 3.4 percent this year, it would be more or less on par with its potential growth level. How much does the economy have to grow to be deemed “saved?”

Despite numerous attempts, the real incomes of 90 percent of Korean workers have been stalled since the mid 1990s. Incomes of the top 10 percent grew faster than the overall economic growth. All the fruits of growth have been bestowed upon the top 10 percent. This is why most people feel they are not better off regardless of growth.

The Korean economy demands rebalancing and restructuring in its distribution structure. Home values and household debt must be deleveraged so they become affordable within income levels. The same goes for public debt. Then corporate and consumer spending will be revived. The labor market requires more flexibility and mobility.

The double structure of the labor market must be fixed. Before the government presses banks to expand loans to startup companies, it must encourage the restructuring of zombie companies that survive on debt rather than on profits. Consumer spending and corporate investment and hiring could temporarily worsen because of restructuring.

Policymakers should interfere through responsive monetary and fiscal actions to buffer the pain. Still, they must be prudent with growth-aimed stimuli actions as they could aggravate economy’s weaknesses and lead to costly catastrophes. The U.S. economy is doing better than the eurozone because consumers’ pocketbooks have gotten fatter through debt deleveraging and a correction in housing prices since the 2008 crisis.

Although there are some differences by country and region, the global economy overall is improving. The world economy is expected to grow faster than last year. The downward spiral in oil prices will also aid growth. Korea must carry out much-needed rebalancing and restructuring when external conditions are favorable.

We need decisive leadership and bold actions from the government. Instead of trying to aim at various reform tasks at one time, the government should be selective and focused. The incumbent government will accomplish a great deal if it succeeds in breaking the rigidity in the labor market and improving the wage structure.

JoongAng Ilbo, Jan. 31, Page 31

*The author is an economics professor at Sogang University.

by Cho Yoon-je