Staring into an abyss

Alarms sounded after exports slipped 15.8 percent year on year in October. Although exports have been falling for most of the year, the current account has been in a surplus for 44 months in a row. Korea’s current-account surplus is estimated to reach a record $110 billion, the world’s third largest after China and Germany. Theoretically, the national coffers should be brimming with foreign exchange reserves. But reserves have been stuck at $360 billion for months. The local currency also should have shot up. But the U.S. dollar has gone up to 1,150 won. The equation does not add up.

When we factor in another key piece of data - the capital balance - all becomes clear. Korea incurred a deficit of $90.38 billion in its capital balance last year. The deficit reached $72 billion in the first nine months of this year. More money has gone overseas than the surplus Korea earned through trade. Korean companies last year spent $25.3 billion building manufacturing facilities overseas or acquiring foreign assets. The National Pension Service bought $20 billion worth of stocks, bonds and real estate abroad so far this year. In today’s world, national income can hinge more on capital gains than revenue from trade.

The data suggests both good and bad things. The good news is that South Korea looks like Japan in its heyday in the 1980s and China in its heyday of the 2000s. Korea has become rich enough to use its surpluses to buy U.S. Treasuries. But the bad signs outweigh the good. Korea no longer can offer investors returns. Local companies and institutional investors are taking their money outside to build factories and invest in assets for better returns.

A senior official at Samsung Group says what companies dread most are the alarming similarities between Korea today and what Japan experienced over the last two decades. Demographic changes - a low birth rate and aging population - have already begun taking a toll on the economy. The next challenge would be a slump in consumption. Korea may be approaching the same abyss Japan tumbled into 20 years ago. The burden on companies will increase if the country enters Japan’s type of stagnation. They will be accountable for the welfare benefits of people aged 55 to 65. Patriotic or not, not many companies will be able to afford to do business in this country.

Samsung Group under the de facto leadership of Lee Jae-yong, or Jay Y. Lee, vice chairman of Samsung Electronics, has been selling non-core businesses such as defense and chemical operations. The younger Lee is realigning the group to brace for a lengthy slowdown at home and prepare for future growth engines like the bio sector, while keeping up competitiveness at the group’s core businesses like memory chips. Kim Hyun-chul, professor of international studies at the graduate school of Seoul National University, said companies must reinvent themselves in order to survive challenging times. Japan’s Uniqlo is a good example, he said. The company set a new standard in fashion - quality apparel in contemporary styles and sold for low prices. To keep up standards without impossibly high costs, the company manufactures all its items in China under the supervision of Japanese managers. The company became the enemy of all other Japanese fashion brands, especially those that continued to produce domestically. But it was Uniqlo that survived the country’s long slump and thrived.

How well is Korea prepared for a lengthy slowdown? President Park Geun-hye’s economic and reform agenda is all muddled. Large companies - except perhaps Samsung - are feigning attempts at restructuring. Many of Japan’s big companies were brought low not by the cataclysm of World War II but from being unprepared for changing times.

Koreans are equally clueless. The legislature is entirely engrossed with the ways we write history textbooks. We may arrive find ourselves deep in the stagnation tunnel because our attention was entirely focussed on political battles over high school textbooks. Japan was totally unaware that it was entering a tunnel that would last for two decades. It would be insane to go down the same path with eyes wide open when warning signs are everywhere.

JoongAng Ilbo, Nov. 3, Page 34

The author is a senior editorial writer of the JoongAng Ilbo.

by Lee Chul-ho