Goodbye to the good old daysSince 2011, economic institutions have repeated the mantra that economic growth would improve the following year, but the economy went from bad to worse. This was because international organizations like the IMF and the World Bank overestimated global growth prospects, and local institutions also erred because they based their outlook for the local economy on inaccurate estimates from their global counterparts.
Growth prospects can fall below expectations because economists do not detect structural changes in economies. Economic forecast models are mostly based on past performances and data and structural changes that can affect the future may be overlooked. If the current growth pace is slower than the past, economists tend to forecast that the economy will do better in the following year. This is why we have been seeing the word “recovery” repeated for years.
The time has come for us to wake up from the wishful thinking that the good old days will return. The potential growth rate for the Korean economy is now estimated at around 2 percent. The exports that have driven the local economy no longer can be relied upon. The world economy is not working favorably for exporting countries. Even with an upturn in advanced economies, their spending won’t increase.
Consumers in advanced economies have gone through painful years of deleveraging and become rational spenders, restricting consumption to health care and leisure instead of purchasing expensive electronics and luxury products. They also have turned nationalistic, preferring to use local brands over foreign ones to help their own economies.
China has become a technology powerhouse on top of being the world’s factory, surpassing Korea in steel and chemicals as well as displays and smartphones. Japanese companies have been revived through a cheap yen, and even European enterprises are making a strong comeback.
The unfavorable turns on the external front and sluggish manufacturing sector mean that Korea no longer can keep up its high productivity and capital investment. Moreover, its working population will peak next year and slowly go south. An economy running with yearly growth in the 2 percent range is not a temporary phenomenon, but something we have to adjust to.
Against such a backdrop, the current economic policy larded with stimulus measures could be dangerous. Supplementary budgeting was inevitable due to the unexpected outbreak of Middle East respiratory syndrome. But if we go on designing fiscal policy to artificially drive the economy to grow more than 3 percent, we may end up saddled with a mountain of public debt without the desired growth. Economic policy should be oriented toward tending to the long-term growth potential rather than quick fixes.
The first and most urgent step should be restructuring the labor market. Countries like Brazil and Mexico never entirely recovered from troubles in the 1970s, and Italy and Greece in the 1980s, because they have not fixed their labor markets. They struggled to combat external shocks at the expense of fiscal integrity and yet did not fully recover because of rigidity in their labor markets. Korea’s labor market also lags behind the international average in terms of flexibility.
Next, the country must expand its domestic market. The local services sector including the leisure, recreation and health care fields are underdeveloped. People want better standards of living but can’t find the services they desire. Real estate prices are too high due to a shortage of land and various regulations.
Better utilization of state properties, upgrades of infrastructure and radical deregulation could grow the domestic market and stimulate demand for jobs, productivity and consumption, and help the economy run in a benign cycle.
Translation by the Korea JoongAng Daily staff.
*The author is a senior economist at the LG Economic Research Institute.
by Lee Geun-tae