What has changed?International Monetary Fund Managing Director Christine Legarde praised the South Korean economy and its turnaround from the financial crisis in the late 1990s. Quoting the Korean proverb, “After rain, the ground becomes firmer,” she predicted the Korean economy would stay solid having gained resilience from “bold post-crisis reforms.” She made the remarks in an international conference in Seoul.
The international lender was equally optimistic about the Korean economy two decades ago. It singled out the South Korean economy as being different even as a currency crisis which began in Thailand in July 1997 spread quickly to neighboring economies.
Yet foreign investors packed up and financial institutions were unable to borrow from abroad, quickly depleting the national foreign exchange coffers. Eventually, the country turned to the IMF for a bailout on Dec. 3, 1997 and went into a stringent turnaround regimen. Companies and financial institutions had to shut down and shed thousands of jobs. The economy contracted 5.5 percent in the following year.
The economy’s rebound was equally dramatic. In 1999, the economy grew by a staggering 11.3 percent thanks to reforms and normalization of the financial markets. The administration under President Kim Dae-jung united the country against an unprecedented financial crisis. Strong exports from favorable external conditions provided the breakthrough. The U.S. government helped Korean enterprises in foreign debt negotiations.
Now, South Korea looks safe from a potential foreign exchange crisis like the one 20 years ago with the state sitting on substantial currency reserves and Korean enterprises in a stable financial structure. But it is facing different kinds of perils on both the domestic and external fronts. It could slide back without ever climbing into the ranks of advanced economies if it does not address the challenges with some kind of vision.
The first domestic challenge is low productivity. Gone are the days of the baby-boomers when abundant labor and brisk investments fueled fast growth. Yet productivity and innovations are lagging to fuel new growth. In its latest global competitiveness report, the World Economic Forum placed South Korea at 83rd place in labor market efficiency and 69th in public policy and political systems. It was near the bottom among developed markets in technology innovations. The economy also scored poorly in the services sector and productivity in small and mid-sized enterprises.
The demographic challenge from a low birth rate and rapidly aging population poses a serious danger to the economy. People aged 65 and older account for 14 percent of the total population, a share that is estimated to reach 28 percent by 2035. The graying economy will almost certainly lose vitality.
The external front offers little relief. Geopolitical risks have escalated to an unprecedented level from the North Korean nuclear threat. North Korea’s tests of intercontinental ballistic missiles and its sixth nuclear test, allegedly of a hydrogen bomb, have created war-like tensions, but no solutions are in sight. The Korean economy could pay a serious price depending on how the North Korean nuclear crisis plays out.
Trade frictions and increasing protectionism also bode ill for our export-reliant economy. China accounts for 25 percent of Korean exports and the United States 13 percent. China has been relentless and uncompromising in its economic retaliations against Korean goods and services after Seoul deployed a U.S. antimissile shield. On top of that, Washington wants to renegotiate terms of the bilateral free trade agreement. This wave of protectionism by the world’s two largest economies hurts Korea Inc.’s export prospects.
The United States accounted for 20 percent of global economic output and China 6.6 percent in 1997. Now, China accounts for 18 percent of global output and the United States 16 percent. The “America First” policy of U.S. President Donald Trump and the nationalistic agenda of Chinese President Xi Jinping pit the two economies in a hegemonic struggle. Our nation’s power and its diplomatic capabilities appear too weak to survive their power game.
Despite these grave challenges, the Moon Jae-in administration does not show much eagerness to unite the public and dedicate resources to fighting the crisis together. Rashness in its approach to solving various problems has worsened social conflict. The ruling party is at odds with the opposition, creating a political stalemate in the National Assembly.
Experts are concerned about the repercussions from the government’s raising of the minimum wage, increasing jobs in the public sector, and the phasing out of nuclear power. The IMF chief also warned against overly hasty increases in wages and advised more spending on ways to combat our waning working population and stagnant productivity.
Rain makes the land firmer because the water strengthens the soil for new growth. The crisis in 1997 brought in useful water. If resources are not united and used well to combat multiple challenges at home and abroad, the country would lose momentum for further development. It is time for the people, political leaders, and the government to solve one problem after another together.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Sept. 21, Page 35
*The author, a former chief economist at the Asian Development Bank, is a professor of economics at Korea University.