Stepping towards new growthKorea stands at a crossroads, and the direction it chooses will determine its survival. Korea’s exports to China, including Hong Kong, makes up 30.1 percent of total exports. Korea’s dependency on China is serious, with trade more than double than that of the United States and Japan combined.
Countries around the world are inflating currency by $11 trillion, or 7.8 times Korea’s GDP, lowering their interest rates and devaluing their own currencies. Korea cannot afford to respond to these changes. Its export competitiveness is weakening. If economic powers take their exit strategies, speculative capital could leave at once, shaking up Korea’s market.
Based on the individual consumer pattern, a country’s spending peaks 47 years after the peak birth point, then decreases to a demographic cliff. Korea’s peak birth point was 1971, so the country is expected to reach its demographic cliff in 2018. While the average lifespan has increased from 40 in 1940 to 81 today, the birthrate is drastically decreasing. By 2040, 1.8 economically active people will have to support 1 senior. Moreover, the manufacturing industry that has been propelling economic development can no longer absorb employment with the extended retirement age and automation.
Korea needs a new growth formula. The priority is attaining economic integration with the 10 countries in the Association of Southeast Asian Nations (Asean), actively supporting and expanding trade with them. Only then can our gross domestic product triple, passing the point at which Korea would become an independent economy.
With a population of 620 million and $2.5 trillion in GDP, Asean has abundant resources. The median age is 12 years younger than in Korea, offering great potential for growth. The cost of marine transport between Korea and Asean countries is on the same level as domestic land transport.
After completing the first phase of economic integration with Asean, or AU-11, Korea should pursue the second stage of including Bangladesh, Sri Lanka, Nepal and Mongolia in the AU-15. Then, China, Japan, India and Pakistan can participate in the final stage of AU-19, accomplishing a substantial Asian economic union.
The Korea-Asean free trade agreement (FTA) has already taken effect in 2007, but excessive protectionism in the agricultural industry limited its actual effect. Due to disproportionate representation in electoral districts, agricultural regions were three times over-represented at the time.
The electoral districts should first be reorganized to open the agricultural market and enhance the effect of the Korea-Asean FTA to lower living costs and save on subsidies, which were 135 trillion won ($120 billion) over the past 10 years.
Financial cooperation with Asean should also be strengthened. By creating the Asian Central Bank, common currency in Asia should be issued to respond to currency speculation and the capital fund should be wisely invested on blue chip stocks and bonds around the world to secure stable earnings. Then, the excess foreign currency reserve of each country can be utilized to increase profits and regional trade can be drastically expanded.
Immigration should also be actively embraced. European nations faced with shortages in their labor force are overcoming the challenge with immigration. Immigrants make up 28 percent and 21 percent of populations in Australia and Canada, respectively. Singapore and Switzerland are more open, with 43 percent and 29 percent of their populations from other countries. However, only 2.5 percent of Korea’s population is immigrants.
In 1971, 1.02 million babies were born in Korea. But in 2014, only 440,000 were born. We cannot overcome our demographic cliff with natural population growth alone. Without drastic immigration expansion, negative growth is inevitable. Therefore, Korea should accept about 0.5 percent of the population as immigrants every year, or about 250,000 people.
The quality of immigration should also be enhanced. In Singapore, 71 percent of the population are citizens and 29 percent are foreigners. Among the citizens, 14 percent are highly skilled immigrants with permanent residency. By strictly separating visa renewal and permanent residency, Singapore elevates national competitiveness. About 31.3 percent of immigrants in Korea are simple skilled workers, while only 2.9 percent are professionals and 4.7 percent are students.
Our homework includes tax reform. The highest income tax bracket in Singapore is only 20 percent, and by lowering the corporate tax rate to 17 percent, Singapore attracted the regional headquarters of 4,000 multinational companies.
Germany and Canada have also lowered the corporate tax rate to 15 percent to bring in foreign investment. Korea’s highest income tax bracket is 38 percent. With lower tax rates, a professional workforce can be brought in and consistent economic development will be possible.
Start-ups also need to be nurtured intensively. Silicon Valley created a new growth engine for the United States. Over 39,000 companies set up by Stanford University graduates hire 5.4 million employees and their annual revenue is $2.7 trillion, similar to France’s GDP.
Silicon Valley encourages immigrant start-ups. Roughly 44 percent of the companies are set up by immigrants. In 2010, 56 percent of Stanford University’s graduate students were foreign students. Korea’s universities need to take an initiative to invite foreign students and create an environment that supports turning their ideas into business start-ups. It is important to establish an ecosystem to help start-ups speedily set up and grow as in Silicon Valley.
Translation by the Korea JoongAng Daily staff
JoongAng Ilbo, June 29, Page 29
*The author is the director of the Sejoing Institution.
by Choo Myung-gun