Focus on the economy
The author is an economics professor at Korea University.
Things are not looking good for the Korean economy. The International Monetary Fund (IMF) on Tuesday projected Korea’s economic growth rate at 2 percent for this year and 2.2 percent next year. The numbers, printed in its World Economic Outlook, were lowered from estimates in April of 2.6 percent for this year and 2.8 percent for next year. Global investment banks are even more pessimistic, predicting growth for Korea in the 1 percent range.
Korea’s economic slump is largely due to a slowdown in the global economy and our government’s failure to respond properly. While exports and facilities investment started slumping, the government repeatedly said the economy was not weak. Its income-led growth policies could not resolve fundamental issues. While growth potential continues to decline, urgent structural reforms have not been attained. Employment among older people increased, but quality jobs for young people are lacking. Both the fiscal deficit and sovereign debt are rapidly increasing.
While the IMF predicted 3.0 percent growth for the global economy this year and 3.4 percent next year, major trade disputes and geopolitical risks could hurt the global economy next year. The growth rate of the United States is slowing after an unprecedentedly long boom. The German economy, which makes up 21 percent of Europe’s GDP, showed minus growth in the second quarter and is not likely to get out of its slump. China is growing, but if the U.S.-China trade war continues, its growth rate is likely to fall rapidly next year. On top of that, Brexit, financial market instability, military clashes in the Middle East, and the Hong Kong crisis add to uncertainties for the global economy.
With a global economic slowdown, the fear of recession is deepening in Korea. Lately, the fear of deflation has been added. In August and September, the consumer price increase was in negative territory compared to the same month the previous year for the first time since those statistics began to be collected in 1965. It is largely due to temporary factors such as price decreases in agricultural products, petroleum and public services. But the rate of price increases in major products — except for food and energy items — also remained at 0.5 percent.
If demand continues to shrink, the Korean economy could fall into a prolonged slump and the kind of deflation that Japan has experienced, coupled with a decline in the population between the ages of 15 and 64. When deflation hits, spending and investment shrink, asset prices fall, and a crisis can intensify. When tax revenues decrease, it won’t be easy for the government to respond to the market with fiscal inputs. Even if the Bank of Korea lowers the benchmark interest rate, it won’t be easy to boost the economy as long as real interest rates are high.
The Blue House claimed that we have not reached a crisis as Korea’s economic growth rate is still higher than developed countries such as Britain, France, Germany and Japan. But Korea’s economic growth rate is at the middle level among the 39 developed countries of the IMF. Many people, small- and mid-sized enterprise owners and the young jobless complain about their hardships. Using only positive indicators and claiming that the economy is not yet in crisis will not relieve their anxieties. An effective policy to prop up the economy and enhance growth potential is needed.
IMF Managing Director Kristalina Georgieva recommended the Korean government increase investment in infrastructure and research and development. Unproductive spending should be cut, and fiscal spending should be increased on effective economic boosters to enhance our growth potential. A drastic tax cut, subsidies for business facilities investment, education and training, and research and development can be considered. The IMF recommended that emerging economies enhance productivity through labor, financial, trade and government reforms.
Korea requires labor market and government reforms more than anything. According to the WEF 2019 global competitiveness report, Korea’s national competitiveness was ranked 13th but falls behind in the following areas: wage determination flexibility at 84th, employment and dismissal practices at 102nd, labor-management cooperation at 130th, government policy stability at the 76th, and the burden of government regulation at 87th.
While these warning signals for the economy crisis continue to flash, economic policies are not being discussed properly. In the last few months, Korea was engrossed in the Cho Kuk controversy and important economic and diplomatic issues fell off the front pages. As the national opinion was divided, many people joined duelling rallies. The Economist recently reported that the importance of academic backgrounds has become a problem in Korean society, where people use the wealth and connections of their parents to succeed. People grew furious about the hypocrisy and corruption of the privileged elite. The Moon Jae-in administration promised to create a nation with equal opportunities, fair process and just outcomes. We still have a long way to go.
It’s up to the politicians to mend the political confusion and social divisions, and renew their attention to the economy. I hope the government corrects its wrong policies and gives hope to the people who are struggling through the economic slump — through proper economic responses and structural reforms.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Oct. 17, Page 34