Toward balanced growth
The government has not acted well against weakening growth potential. It has not made much progress in the public, financial, labor and education sectors. Its actions to address the low birth rate and an aging population also are lacking. The signature project of promoting a “creative economy” appears to be stalling as it initially took off after pressuring large conglomerates to invest. Worse, the quality of growth has deteriorated. The economy was inflated purely on construction investment riding on the housing boom from deregulation. As a result, households are saddled with debt and companies face insolvency.
The Korean economy much resembles what Japan went through in two decades of stagnation. Structural problems built up while failed policies helped little to uplift the pace of growth. All the weaknesses could lead to a crisis next year. The external front is still volatile with the United States poised for higher interest rates, the British reading from its divorce from the European Union, and the Chinese economy further losing steam. The government in charge of addressing these multiple challenges is under an existential threat of having entirely lost confidence from the people. The economy is headed for a cliff.
Economic policymakers should get their acts together in these turbulent times and fight the out-of-control household debt first and stabilize the housing market to appease internal instabilities first. They must minimize damages from overseas through flexible financial, fiscal and monetary actions. They must clean up the zombie companies before they drag down the entire economy. Preemptive corporate restructuring can keep the crisis at bay and strengthen growth potentials. The International Monetary Fund also believes the Korean economy could grow faster if it deleverages corporate debt well.
Korea’s per capita income is stuck at $27,000, just half of the earnings of the United States, Singapore and Australia. The economy must grow at a faster pace to raise living standards to Western levels of $40,000 to $50,000. The government must do its best to combat our economic weaknesses and raise productivity to avoid the path of Japan and join the ranks of advanced societies.
The economy must first tend to its inequalities and find a path for balanced growth to keep up a stable and sustainable pace. The disparities across companies, industries and classes in the process of their fast condensed expansion are undermining improvements in productivity. The country has not built an efficient economic system to breed creative talents and innovative enterprises.
The economy has relied too heavily on large manufacturing exporters, widening the gap between large and smaller companies and the manufacturing and services sector. According to data by the Organization for Economic Cooperation and Development, a worker in the Korean service sector yields 45 percent of the output of manufacturing counterpart, compared with the 90 percent OECD average.
Productivity of the Korean small and midsize enterprises also reaches 31 percent of large counterparts. The value-added industries in medical, tourism and business services sectors must be liberalized to bolster productivity and decent jobs. Dominance by chaebol must be eased to make way for competitive smaller players. Venture start-ups should have more chance to succeed.
The gap between education and work ability also has widened due to a fast evolution in industrial structure and technology. Elementary and secondary education fails to breed creativity, and universities turn out inept graduates. In a 2013 survey by the Program for International Assessment of Adult Competencies, 27 percent of Korean college graduates considered themselves overeducated. The knowledge and skills they learned in college don’t help in the workplace. Korean workers lag in work capability compared with their Japanese counterparts and are not adequately rewarded for ability and performance. The education and labor sectors must be reformed to improve.
We no longer can delay fixes in income inequalities in order to prop up growth potentials. Various methods to accelerate growth have been suggested in the name of a “people-focused” and “symbiotic” growth for the next presidential election agenda. They propose prioritizing policies promoting social wealth over strengthening growth potentials. Populist policies can increase wasteful public expenditures and further restrict economic freedom as well as making the labor market more rigid.
If disparities across industries and companies ease and education and labor sectors are reformed to improve productivity, cross-sector and class migration would be accelerated, helping in the end to rationalize income distribution and retool the economy for balance growth.
Balanced growth has long been pitched in economics classes and upheld by Group of 20 governments. We need a push for balanced growth to mend the weaknesses and inequalities in our economy. We long for strong economic leadership to reinvigorate the country’s economic fundamentals and provide traction for a leap toward the advanced ranks.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Oct. 31, Page 31
*The author, a former senior economist at the Asian Development Bank, is a professor of economics at Korea University.