The future starts nowThere are two distinct differences between the outgoing and incoming legislatures. The 20th National Assembly will be starting office at the start of the thinning of our working population aged between 15 and 64 after peaking this year. They will work in a three-party system while its predecessors over the last 16 years were run by two dominant forces. A waning working population and increased political instability coincidentally resembles the conditions of Japan in 1990s before it slipped into its so-called lost two decades. Korea’s future could be shaped by the 20th Assembly. In other words, we could be inviting Japanization, or prolonged stagnation, if the assembly fails to do the right things.
Japan’s woes over the last two decades are obvious from its gross domestic product data. Japan’s real GDP has been sinking since 1997, when it was 523.5 trillion yen ($4.74 trillion). It shrunk to 487 trillion yen in 2014. It has never returned to the 1997 level over the last 18 years. We’ve never seen our real GDP fall. Nominal GDP declined once in 1998 when the won tumbled during the Asian financial crisis. It was reduced by 1.1 percent, and the repercussions were huge. We cannot imagine what the Japanese have been going through as their GDP decreased for nearly 20 years.
The Japanese government tried to do whatever it could think of to reverse the tide. It implemented all possible fiscal and monetary means. From 1990 to 2005, it injected a total of 1,500 trillion yen to stimulate the economy. By the mid-1990s, its interest rate policy went to nearly zero. It was the first among central banks in the world to introduce quantitative easing through bond purchases in 2001. But nothing worked. Fiscal deficits piled up and yet the economy failed to budge.
The policy misfires were largely due to a demographic setback. The number of people who were willing and eligible to work began to thin out from 1995. The country was categorized as a graying society in 1994 with the share of people aged 65 or older accounting for more than 14 percent of the total population. Consumption stalled. People both old and young saved to prepare for lengthy retirements instead of spending. No government stimuli changed their behavior. Productivity also deteriorates in an aging society. The economy lost vitality as both demand and supply became depressed. That is how Japan muddled through the darkness of stagnation for nearly two decades.
We are headed down the same path. From next year, our working population starts to go down. The aging population goes above the 14-percent threshold next year. The demographic cliff coupled with a prolonged slowdown is a fatal mix for the economy. Worse, the phenomenon is something we’ve never experienced. We soon have to accept that over-65 senior citizens are the mainstream of the population. We can try to stall the crisis through an extension of the retirement age. But this is just a makeshift measure as it cannot help mend our worsening productivity and sluggishness in consumption. There is no hope in a stagnant society where income and population do not increase.
Structural reforms are the only solution. To boost investment, distressed companies and unnecessary regulations must be removed. To upgrade human capital, the education and labor sectors must be reformed. To bolster productivity, technology and innovations must be promoted through vitalization of the services sector and new industries. Japan would have known such solutions but could not act because it lacked strong political leadership to spearhead reforms in the early 2000s.
Japanese politics were chaotic at the time. Prime ministers didn’t last long. Before incumbent Prime Minister Shinzo Abe took office in December 2012, there were 14 prime ministers from 1991. They lasted a year at best. No leader can exercise leadership in such unsettled political conditions. Reforms were half-baked and short-lived. Restructuring was kicked down the road from one government to the next. The government and central bank wrangled over the means to fight deflation. The finance ministry wanted the Bank of Japan to be more aggressive in liquidity easing while the central bank urged the government to do more through fiscal expansion.
The 20th National Assembly cannot be deemed entirely hopeless. The 19th Assembly was the worst-performing ever, even with the ruling party commanding a majority in the legislature. The legislature is not entirely to be blamed. In fact, the presidential office and government are more at fault. A three-party legislature can still draw social consensus and support if they join forces by prevailing over their contentious ways. If we do not immediately tend to ailing companies and industrial sectors and restructure our economy and continue on with endless political standoffs, we will find ourselves in an even worse state than Japan. Japan hung on because it had more valuable technology than we do. The 20th legislature has a great responsibility to decide our future.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Apr. 22, Page 28
*The author, a former editorial writer of the JoongAng Ilbo, is an adviser at the Korea Institute of Finance.