Rushing for the exits
The author is a columnist of the JoongAng Ilbo.
One foreign financier who has lived and worked in Seoul for 30 years confessed he cannot make heads or tails of the policies of Korean governments — the “creative economy” under former President Park Geun-hye or the “peace economy” of President Moon Jae-in. “One thing is for sure. Foreign capital has lost interest in Korea,” he said. JP Morgan Asset Management Korea has folded its fund business in Korea after 11 years and cut executive positions by nearly half. Swiss investment bank UBS also sold its stake in UBS Hana Asset Management, a joint venture with Hana Financial Group. “Foreign capital has been suspected of being predatory. But these days, foreign capital isn’t coming as there are no targets in Korea,” he noted. Korea has entirely lost its appeal to foreign capital.
Over the last two years, foreign financial names — including Goldman Sachs, Barclays, and Macquarie — have all pulled out of Korea after shuttering their outlets in Seoul. They had sustained their business through the U.S. dollars they brought from their headquarters at cheap rates, but they no longer make money due to low growth and low interest rates in Korea. There are few local industries and companies that can assure handsome returns. More and more have become skeptical of the Korean economy. As a result, foreign direct investment by Korean enterprises reached a fresh record high of over $15 billion in the first half, whereas foreign direct investment in Korea hovers below $10 billion.
President Moon Jae-in may boast that he has rebuilt “a fallen country” during his two and a half years in office. But the economic front tells the opposite story. The Korean economy is a total wreck. Its growth rate has stalled at under 2 percent. All the data are at their worst since either the wake of the 1997 bailout crisis or the 2008 global financial crisis. The government puts the blame on external conditions stemming from a protracted trade war between the United States and China. But the greater problems are from within. The benchmark interest rate has revisited the historic low of 1.25 percent, and fiscal spending this year increased by 9.5 percent to a record 469.9 trillion won ($394.5 billion). The exchange rate conditions are favorable — with the U.S. dollar trading at 1,190 won. Under such conditions, exports should increase and the growth rate should soar. But exports have been slumping for 11 straight months and capital investment has been in a downward spiral for six quarters. That means our economy has been performing below its growth potential.
What has weakened the economy so badly? In a recent interview, Kim Kwang-doo — who vice-chaired the presidential National Economic Advisory Council under President Moon — attributed it to government policies disregarding productivity, which has weakened struggling businesses and their competitiveness and led to reduced hiring. He admitted the incumbent government has erred by dampening business sentiment and market activity.
The government has vowed to place top priority on creating jobs. Instead, irregular jobs’ numbers increased. Although the government blamed changes in statistical guidelines, experts have warned of the consequences from a steep increase in the minimum wage. Employers have opted to hire more temporaries instead of regular workers to avoid paying them at the statutory hourly rate that went up by double digits for two straight years. The government spent heavily to make jobs that were mostly temporary hires of senior citizens who settle for anything. The self-employed who hired part-time workers are also facing trouble and now have to run businesses with family labor.
Local and overseas institutions, including state-run Korea Development Institute and IMF, point to waning international competitiveness in key industries as the economy’s fundamental weakness. Korea lags behind advanced economies in value-added high-tech industries while being closely chased by Chinese competition in traditional industries. Public policies have neglected structural reform — and instead focused on distribution — only to worsen rigidity in the labor market and lower productivity. International credit rating agencies like Moody’s and Standard & Poor’s warned that the economy is headed for lengthy stagnation due to the government’s business-unfriendly policies, such as the rapid hikes in the minimum wage, a uniform application of the 52-hour workweek, higher corporate taxes, stronger unions and excess social welfare spending.
Budgetary spending should increase at times of economic downturn. But fiscal expansion should be aimed to buy time and address low growth and income disparities through restructuring. Rhee Chang-yong, director of the IMF’s Asia Pacific Department, noted the “purpose of fiscal spending.” Spending should not go to creating temporary jobs in the public sector, as that is not a fundamental solution. Restructuring is essential to ratchet up our growth potential and enable sustainable growth. Budgets should be used to expand social security to help the needy, not to create jobs, he stressed. However, fiscal spending went to the wrong places. They are not productive investments that can spur growth but more or less generous handouts in the form of allowances for senior citizens, child care and public work for seniors.
Housing prices in Gangnam — the hot zone in southern Seoul targeted in a bombardment of real estate regulations — have only shot up as a result of a series of amateurish measures. Over the last two and a half years, the government has come up with real estate measures 17 times. But apartment prices in Seoul soared 30 percent. While imposing a price cap on new apartment offerings, the government has left out districts in Seoul like Mok-dong and North Ahyeon-dong — constituencies of lawmakers close to the president. A district in Goyang city, the voter base for lawmaker-turned-land minister, Kim Hyun-mee, and Busan, the support base for Moon and his confidantes, were exempted from regulations. Such political considerations in real estate policy have driven speculators to Busan and Daejeon to sweep up unsold apartments. In an offering in Gangnam, 461 bids were made for each available unit.
Alarms have also been sounded for Korea’s longer-term risk. The country has maintained its investment-grade sovereign rating by maintaining a current-account surplus of over $100 billion and its national debt rate under 30 percent of the GDP.
But the government has stretched the debt issue ceiling to 60 trillion won for next year even as tax revenue has slowed as corporate income has halved. Hong Nam-ki, deputy prime minister for the economy, admitted that the debt to GDP ratio could top 40 percent soon and hit 45 percent in 2022. National debt that reached 680 trillion won last year is expected to exceed 1,000 trillion won in 2023. The surplus in the current-account balance also shriveled to $41.4 billion as of September this year. Korea is headed for a downgrade in its sovereign rating.
The government has missed both targets of growth and distribution through half-baked policy experiments on the economy. Excessive meddling in prices and markets to inflate total demand has only increased corporate costs and hurt supply. The harmful intervention has caused a job disaster, the weakest growth in a decade, and worst-ever income disparities. Economists agree that nothing can change unless the government veers away from its failed policies. But Moon remains holding the course on policy.
In his latest book “Upheaval: Now Nations Cope with Crisis and Change,” Pulitzer-awarded author and anthropologist Jared Diamond prescribed 12 ways for countries to combat crisis. First, crisis must be admitted and identified, and then authorities should accept accountability and set good examples. Honest self-evaluation is also important. This advice should serve the Moon Jae-in government well. The government keeps saying the economy will get better. But it keeps on the doomed path of Venezuela instead of the ways that have revived the United States or France.
If the government keeps on deceiving itself, the public will completely lose confidence in it. The economy will retreat as it is in the wrong gear. If it stays on the wrong path, the economy cannot have a future.
JoongAng Ilbo, Nov. 13, Page 26