An economic catastrophe

The Korean economy fell 0.3 percent in the first quarter, the first dip since the fourth quarter of 2017 and the largest fall since the 3.3 percent drop in the final quarter of 2008. The latest gross domestic product (GDP) is a dismal reality check on Asia’s fourth largest economy. Against a year ago, it grew 1.8 percent, just half of the 2.6 percent targeted for the full 2019. No one can doubt the economy is in its worst state in a decade.

The contraction largely owes to a drop in outbound shipments and sluggish investment. Exports fell 2.6 percent and imports fell 3.3 percent as global commerce declined from the trade war between the United States and China. Korea’s key electronics shipments — semiconductors and displays — were hurt by softening demand and prices. Industrial investment plunged 10.8 percent, the biggest drop since the 24.8 percent tumble in the first quarter of 1998 after the country sought international bailouts. Construction investment also dropped 0.1 percent, as government real estate measures sent the housing market to a standstill. A separate survey by Statistics Korea showed that average household monthly spending fell 0.8 percent on year in 2018. There is no single activity that can fuel growth for the economy.

The Moon Jae-in government has to think seriously about the viability of its income-led growth policy experiments. The idea has been to bolster wages and income to stimulate consumption that can, in return, generate corporate investment and growth. But nothing — consumption, investment and growth as well as income — has increased. The disposable income of two-person households gained 1 percent on year in 2018, but growth turned negative when counting those living alone. With the exception of those earning at least 5 million won ($4,310) a month, spending by households in the lower-income bracket all fell.

It is no wonder companies have shaved hiring and investment. The double-digit rise of the minimum wage over the last two years has made hiring too costly for many workplaces.

The 52-hour workweek dampened the competitiveness of IT companies and others, which cannot keep up their productivity at a traditional or uniform work schedule. The government champions innovation, but the corporate sector feels its policies intimidating and meddlesome. Heavy government spending only has undermined the will of the private sector. Policies do not always bring about the desired effect.

If the economy can be likened to a machine, policy is its manual. The devastating GDP data indicates that government policies have steered the economy into harm’s way. The engine of the economy didn’t just lose steam but could potentially stop. In an emergency meeting after the GDP figures were released, the government expressed confidence about a recovery through the supplementary budget and stimuli program. The government will be squandering its money if it does not stop now and examine the problem that is devastating the economy.

JoongAng Ilbo, April 26, Page 34