Combating slow growthEconomic stagnation - slow or little growth - looks more and more like a fixed condition for Korea. The government, which earlier hoped for an annual gross domestic product growth of 3.8 percent this year, fears the pace could be significantly slowed to the 2 percent range. It drew up a fiscal stimuli package worth 22 trillion won ($19.3 billion) including a supplementary budget of 11.8 trillion won in the hope of pulling up growth to 3 percent.
But of the additional budget of 11.8 trillion won, 5.6 trillion won will be used to cover a shortfall in tax revenues and the remaining 6.2 trillion won will be used to prop up economic activities. That raises doubts as to whether it will be enough to rejuvenate a supine economy. The government could not come up with more aggressive stimuli and get it past the opposition and the public because it lacks financing plans to carry out welfare programs the president promised in her election campaign.
The unexpected outbreak of Middle East respiratory syndrome (MERS) was one factor in the low growth, but the economy is expected to underperform mostly due to declining exports. Exports, which have solely sustained the economy amid a slump in domestic demand, have been seeing year-on-year declines for six straight months. Despite falling exports, authorities have been sanguine on the grounds that the current account has kept a sizable surplus for 39 consecutive months. Bolstering domestic demand in order to compensate for the losses overseas could take time as the environment for corporate investment must improve. What’s more urgent is to address the cheap yen situation to help the export sector.
Moreover, the consumer price index rose just 0.7 percent compared to a year earlier, raising concerns about deflation. Things in Korea are looking similar to Japan in the 1990s when it was at the onset of a deflationary cycle that would last for two decades. Under such serious circumstances, the government must employ all possible fiscal and financial policies to motivate companies to invest and help them sustain competitiveness.
But the Bank of Korea (BOK) already cut the benchmark interest rate twice this year, pushing it to a historic low of 1.5 percent. The central bank dares not push it any lower over concerns about foreign currency flight due to the Greek crisis and as the U.S. Federal Reserve is expected to raise interest rates in coming months. It is also not bold enough to carry out quantitative easing like Japan and the European Central Bank. The BOK can no longer do anything to help the country avoid stagnation.
But there are still some options left. Financial authorities can lift regulations to strengthen financial institutions’ lending capabilities. The central bank should expand bridge loans to help small and mid-size enterprises and self-employed businesses. The National Credit Union Federation of Korea, which mostly deals with small and mid-sized merchants, sits on piles of reserves because of various lending restrictions. As a result, the federation is left with no other choice but to put 12 trillion won of its 15 trillion won reserves balance in bonds that get returns of less than 5 percent.
What’s most worrisome about Korea’s economy is that long-term prospects - 20 to 30 years down the road - are as dim as today’s. The state-run think tank Korea Development Institute estimates the country’s potential growth rate will lose a percentage point every 10 years from the 3 percent range in the 2010s to reach 1.5 percent by 2035. The biggest weakness is a shrinking of our working population from 2020 due to Korea’s low birth rate.
But there is also a solution to our shortage of labor. The 10 percent of young people without jobs, housewives, who had to quit jobs to care for families, and retired people under 65 are capable and willing to get into the workforce if they are given the right training and opportunities. The government has a duty to provide retraining programs for job seekers and companies must cooperate by offering internships and other opportunities. Korea must also consider radical immigration reforms. It should offer permanent resident status or citizenship to foreign nationals who have been working in Korea for a long time or wish to live here and are qualified in other ways.
Productivity must be improved in order to sustain growth. If all economic players join forces to accelerate innovation, that task can also be achieved. At the same time, political reform for more efficiency in running the nation should be accelerated as politicians and the government often hamper the corporate sector’s innovations.
Korea has a secret remedy to solve many of its problems in productivity and demand. The economy could receive a major boost if it could make use of North Korea’s cheap labor and also tap into its immense infrastructure needs. North Korea has over 20 special economic zones, but they remain idle. South Korean companies can move into them and use the new regional bank set up by Beijing to raise funds for an infrastructure boom in North Korea. If we can revive the can-do spirit that we perfected during the early industrialization period, there is nothing we cannot achieve together to fight off challenges and pave the way to a sustainable future.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, July 15, Page 35
*The author is the former Minister of Information and Communication and Minister of Finance and Economy.
by Kang Bong-kyun