The long-term challengeCome to think of it, the early 2000s were a great time until the global financial meltdown in 2008. Although the president was criticized for having given up on the economy, world trade rapidly grew at the time, at an average rate of 15 percent annually. The situation is completely the opposite today. Over the past four years, global trade actually shrunk by an average 2 percent annually.
The good times owed a lot to China, which came into its own as the world’s factory. Raw materials and intermediary goods were shipped to China and finished products were shipped out. As the shipments increased, shipbuilding and maritime industries enjoyed a boom. Korea, with its talents in shipbuilding and transportation — and its proximity to China — particularly benefited.
The stock price of Hyundai Mipo Dockyard is a good example. It skyrocketed from 2,760 won ($2.48) in 2002 to 400,000 won in 2007. If you invested 100 million won, the investment would have become 15 billion won in five years. The composite stock price index also rapidly escalated. It was 479 in 2001 and rose to over 2,000 in 2007.
The Korean economy is now suffering from consistent low growth. Since 2012, it has failed to reach its so-called potential growth rate four years in a row. One of the major causes was slowed exports. Since 2012, the growth in our exports slowed and then they started to actually decline. The first half of this year was the worst. One of the reasons is the sluggish global trade since 2012. Last year, it went down by 12 percent. Another reason is China’s slowed growth. Exports to China have gone down since 2014.
Added to this predicament are three more crises. The first is Brexit, the U.K.’s vote to leave the EU. The second is growing trade protectionism in the U.S. The third is China’s growth strategy focused on domestic consumption rather than exports. Those three conditions will further shrink global trade and Korea’s exports.
Brexit is a long-term problem and the impact on the Korean economy will be relatively weak. Brexit will hit the EU’s economy and that of China, the largest exporter to the EU. As a result, global trade will be hobbled and Korea’s exports too.
The U.S. problem is more immediate. No matter who becomes the next president, neo-isolationism and anti-globalization will be strengthened. Free trade agreements will become outdated, while trade barriers will be raised. Countries with large trade deficits will likely be designated as currency manipulators. Korea’s exports to the U.S. will undeniably be hurt. The possibility of being labeled a currency manipulator, in particular, is threatening because our trade deficit will be large despite shrinking exports. Our explanations will not be accepted very generously.
The China factor is another strong blow, as it will be hard to maintain the current level of exports. According to the Bank of Korea, exports to China will decrease by about $5 billion annually starting this year through 2020. That means a 3 to 4 percentage drop every year.
What do we have to do? Korea must not lose faith in globalization as is happening in the U.K. and the United States. No matter what happens, we must try to maintain the system of free trade. Some call this “Korenter,” the opposite of Brexit.
Another issue will be overcoming sluggish exports caused by the isolationism of the United States and slow growth in China.
Exports of services is an answer. Our services industry is weak. While the contribution of services to GDP is about 80 to 90 percent in Germany and France, Korea’s figure is only 46 percent. Korea’s exports of services are also weak. In advanced economies, exports of services is over 10 percent of their gross domestic product, but Korea’s exports of services is about 7 percent.
And yet, this is the sector that can mitigate the threats coming from the United States and our slow exports to China. When productivity is heightened, we can actively use China’s consumer-focused strategy.
Exports of services also fits the current development stage of the Korean economy. When an economy matures, manufacturing industries often decline. Advanced economies made up for the decline with the growth and exports of services.
Furthermore, services are very good for job creation, so they will be a great help to Korea, particularly its generation just coming into the workforce. Because our manufacturing industries are suffering, we must find a new growth engine in a wide range of services. The first clue to industrial restructuring can be found here. But whether that strategy is really being tried is another matter altogether.
The National Assembly repeatedly shunted aside the services industry advancement bill, while attempts to open up the services market in such areas as education and medical services were blocked. Although critics said ideological differences and conflict of interest are the obstacles, the main reason is the failure of politics. Politicians, who are supposed to mediate conflicts, are actually fueling conflicts.
Because of this, the country lost its general ability to find a social consensus on such needed changes in our economic structure. The situation was similar in Japan, which suffered “lost decades.” Politics is always the problem.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, August 5, Page 24
*The author, a former editorial writer of the JoongAng Ilbo, is an advisor of the Korea Institute of Finance.