INTERVIEW Economy set to continue solid growth in 2018
Prof. Sohn Sung-won at California State University-Channel Islands / Korea Times file
Deregulation should be Moon administration’s top priority
By Kim Jae-kyoung
A noted global economist forecasts the South Korean economy will muddle through 2018 and continue to show resilience by benefiting from robust performances of the United States and China.
“The economies of both the U.S. and China should do better in 2018,” Sohn Sung-won, professor of economics at California State University-Channel Islands, said in an interview.
“Emerging economies should show solid growth, which means Korean exports will perform well in the new year.”
He predicts Korea’s GDP growth should approach 3 percent in 2018. The economy is estimated to have grown 3.2 percent in 2017.
“Korea's long-term potential growth rate is 3 percent or lower. A 3 percent economic growth rate in 2018 is pretty good,” he said.
He expects semiconductors, shipbuilding, cars and car parts will be some of the strong performers.
However, he warns the government to brace for sharp downturns of these sectors because they are very cyclical industries.
“Sooner or later, these sectors will contribute to an economic downturn as they have in the past,” he said. “This type of cyclical behavior is well documented historically.”
Sohn, who was the chief economist at Wells Fargo, suggests Moon place top priority on removing unnecessary regulatory barriers in 2018 to provide the impetus for growth.
“With the new budget package, President Moon has done what he could do in the near term,” he said.
“However, there is more to be done in deregulation. The Korean economy is suffering from too many stultifying government rules.”
As for monetary policy, the veteran economist said the Bank of Korea (BOK) should not increase interest rates hurriedly just to follow the voter mandate because it could put a damper on growth.
“My concern is the BOK would throw cold water on the Korean economy by raising the interest rate prematurely,”he said.
He said both fiscal and monetary policies should go hand-in-hand.
“At some point the BOK may have to raise the interest rate but this is not the time,” he said. “It should wait and see how the fiscal stimulus unfolds.”
He made it clear the BOK should manage its interest rate based on its economic outlook for Korea, not on how the Federal Reserve acts.
“Some worry there will be capital outflows from Korea. Some hot money could leave Korea, but the rest of the foreign money won't be affected,” he said.
“For example, foreign direct investment in Korea is a function of how healthy the Korean economy is in the long run, not a function of how central banks manage their interest rates.”
Debt polarization deepening
Sohn sees the distribution of the debt as one of most serious issues Moon should address in the short run.
“People at the lower end of the income spectrum tend to have more debt, while the wealthy and the chaebol have less debt,” he said.
In his perspective, every society has to grapple with growth versus distribution, and to some extent there is a tradeoff between the two.
“One cannot always have their cake and eat it too,” he said.
“President Moon in part has increased emphasis on distribution by raising taxes and spending more money on social services.”
However, he said the high debt burden is a problem because it depresses consumption, but the debt is within manageable levels.
“Korean households have a lot of liquidity on their balance sheets,” he said. “Compared to their American counterparts, Koreans have more cash which diminishes the burden of the debt.”
Sohn, who served as a senior economist on the President's Council of Economic Advisers for Richard Nixon, dismissed concerns the Moon administration is spending too much on social welfare.
Moon has been criticized by some economists for introducing too many populist policies, such as creating more jobs in the public sector and increasing the minimum wage.
“Among OECD countries, Korea is at the lower end of the spectrum for expenditures on social welfare,” he said.
“In economics, there is a constant tug-of-war between growth and distribution. When the people voted in President Moon, the Korean voters approved additional spending for social spending.”
He cited the aging of the workforce and slow productivity gains as long-term obstacles to economic growth.
“Demographics is the most serious problem facing Korea and the problem is worse than those facing many of Korea's trading partners,” he said.
“Without a young and growing labor force, it is difficult to grow an economy.”