Deregulation and restructuring are the keys

Jun Kwang-woo
The author, a former chairman of the Financial Services Commission, is chairman of the Institute for Global Economics.

The updated quarterly outlook from the International Monetary Fund (IMF) last month highlights tough challenges for the Korean economy. In the sole downgrade among major economies, the IMF lowered this year’s growth outlook for Korea to 1.4 percent, which is less than half the estimated global average of 3 percent. The fifth consecutive cut underscores the apparent downturn in an economy struggling with the double deficit in trade and fiscal balance. Most international banks’ prediction of a growth in the 1-percent range for Korea next year deepens concerns about a continuous slowdown for the country.

In contrast to the soft landing of the U.S. economy and the better-than-expected performance of the Japanese economy, China is wrestling with deflationary pressure from subdued demand at home and abroad. On top of that, bursting bubbles in real estate assets have triggered a default crisis for property behemoth Country Garden and spilled over to the shadow banking of investment trust companies highly reliant on real estate investment. The misfortune of the Chinese economy — referred to as a “ticking bomb” by U.S. President Joe Biden — is bad news for Korean exporters, as it requires urgent action from them to diversify their external trade and investment strategies above all.

Against a plethora of challenges, Korea is short in policy ammunition. It cannot resort to the typical monetary and fiscal policy to prop up the economy. Due to the entrenched inflationary pressure and renewed increase in private debt, the central bank cannot easily shift away from tightening. The government is constrained in fiscal expansion due to its reduced tax revenue from the economic slowdown on top of its deteriorated fiscal health from five years of overspending. Unlike in past crises, Korea cannot wield these fiscal tools to combat these challenges.

The government has only one option left to salvage the economy without extra spending — in other words, eliminating unnecessary regulations and expediting structural reforms to strengthen the fundamentals of the economy. Raising efficiency in the three determinants of growth potential — labor, technology, and capital — is a must for a dramatic turnaround in the continuous fall in the economy’s growth potential.

The government must push for the efficient distribution of its pledged reforms in the labor, education and financial sectors. Deregulation and labor reforms are essential to stimulate private-sector investment and attract foreign direct investment (FDI). For instance, the government must raise the attractiveness of so-called “greenfield investments” — where a parent company establishes a subsidiary in a foreign company — by improving the investment environment for FDIs.

In the age of the fourth industrial revolution marked by generative AI, a nation’s future depends on education. When I asked David Rubenstein — a billionaire investor and co-founder of The Carlyle Group — what was special about the Jewish education that has generated so many Noble Prize-winning scientists and influential financiers on Wall Street, he said the secret lies in the dinner table conversation. Jewish parents want to know what unique questions their kids asked in their classroom, and not necessarily about their grades. Questioning could one day lead to Noble-recognized discoveries, and education reform must focus on developing students’ creativity and diversity.

Since a deepened economic slump can worsen fiscal conditions, the government must aggressively study measures to boost the economy. It needs a two-track strategy to bolster mid to long-term growth potential through structural reforms and take an immediate action to mitigate the spread of shocks and slumps. Structural reforms and economic stimuli need not be contradictory, as they can be complementary when aptly applied.

Financial security is essential in the face of a perilous environment in the global economy. Korea, the U.S., and Japan held a historic tripartite summit in Camp David last week. Having joined a Camp David summit between then Presidents Lee Myung-bak and George W. Bush in 2008, I remember how the event elevated mutual trust and led to the fast currency swap agreement following the outbreak of the global financial crisis that year. The three countries could consider a follow-up measure such as a three-way currency swap agreement as a testament to their strengthened security and economic ties.

Translation by the Korea JoongAng Daily staff.