Corporate investment is keyEconomic policies are essentially the byproduct of their times. Korea’s so-called Black Friday - an extended imitation of the post-Thanksgiving sales in the U.S. - was promoted by the government for two weeks in early October to boost consumer spending. It’s a perfect example. Black Friday in the United States is usually the busiest shopping day of the year and it allows U.S. retailers to sell off their inventory through discounts. In Korea, its adoption is an experiment that could be worth introducing in economics textbooks regardless of its outcome.
Needless to say, consumption is crucial to an economy. The ultimate goal of economic policies is the improvement of public well-being, which can eventually be attained by individuals’ purchase of goods and services. In Korea, private consumption accounts for about half of the gross domestic product. To stimulate aggregate demand, consumer spending must pick up. It is particularly so in the U.S., where consumption contributes to approximately 70 percent of the economy.
This year’s Nobel Prize in Economic Sciences went to Princeton University Professor Angus Deaton for his contribution to deciphering the connection between individual consumption decisions and the effect on the whole economy. Even without referring to consumer behavior theories and empirical studies, it is hard to explain how seasonal sales in large retail shops can boost consumer spending to the extent of aiding the broader economy in macroeconomic terms.
Moreover, Korean consumers are restrained by a dangerously high level of household debt. If the government-led stimuli leads to an increase in household debt, consumption in the future could contract. A planned interest rate hike by the U.S. Federal Reserve and the subsequent rise in international rates could make times harder for debt-saddled households in Korea.
To put it simply, a spending stimulus at a time when prospects for stable income boosts are murky could only have had a restricted - and even adverse - effect. The credit-card binge encouraged by the government to revive the economy following the 1997-1998 financial crisis period backfired into a major individual and corporate debt crisis in the 2000s.
That’s why the government’s economic policy should be focused on stimulating corporate investment to push the economy off the slow track and raise the potential for long-term, sustainable growth.
Our corporate investments take up nearly 30 percent of GDP. Therefore, revived corporate activities could solve the short- and long-term challenges of boosting growth. Of course, it won’t be easy for local companies to keep up investment compared with their U.S., German and Japanese counterparts, where investment ratios against GDP hover around 20 percent.
But our companies must increase investment in promising areas, especially in research and development. Korea Inc. must invest in digitalization and retool for next-generation industries. The smartphone business proved that R&D investment is the key to success as the creators of new innovations are the ones that also create new demand.
Therefore, policymakers must study why corporate investment remains sluggish. If the local business environment is less friendly than overseas, it must fix that first. A study by the Korea Chamber of Commerce and Industry showed that the biggest reason local companies prefer taking their investments overseas is labor-related. Stretching out to global markets is a good thing, but not so when local companies are going abroad because the business environment is unfavorable on their home turf.
That’s why labor reform is important. Also, high-valued jobs and investment leading to new hiring can be offered from the services sector. That sector is still underdeveloped due to weak investment because of high regulatory barriers that cannot be removed due to social and political resistance.
Despite these critical times, the National Assembly and politicians are mired in political wrangling over the state authoring of history textbooks - a topic that needs to be decided entirely on reason without any political motives. As a result, they drag their feet in passing a handful of bills designed to accelerate labor reform and create more jobs to aid our supine economy. The government and legislature also must hasten policy and legal actions to expedite corporate restructuring to clean up zombie companies surviving entirely on debt, which are time bombs in danger of blowing up any time international interest rates move up.
The government must push ahead with a reform agenda with unwavering resolve and leadership through persuasion of the public at large. Big companies must work harder to help out their smaller counterparts and the majority of workers still unprotected by large unions to win public confidence. That’s the only way the government can improve our business environment without stirring public protests and criticism of favoritism to large companies.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Oct. 19, Page 32
*The author, a former finance minister, is an adviser to the JoongAng Ilbo.
by Sakong Il