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| Nobel prize-winning American economist Thomas Sargent speaks with The Korea Times in Seoul, Thursday. |
Economist calls for market-determined wage, beefing up R&D
By Lee Kyung-min
Pessimism about the Korean economy has become dominant, with all indicators pointing to a downturn.
Many economists are raising concerns that the country is slipping into a low growth trap with its twin engines of growth ― exports and domestic demand ― losing steam simultaneously.
But a Nobel prize-winning American economist remains upbeat about Asia's fourth-largest economy citing its talent and innovative Korean firms.
"I am very optimistic," Thomas Sargent of New York University said in an interview with The Korea Times jointly held with its sister newspaper the Hankook Ilbo in Seoul, April 24.
"The most important resource is people, who are hard-working. Koreans value and respect education, higher education. It might be one of the most highly educated populations in the world," he said.
"I taught Korean students at Seoul National University (SNU). I have friends and colleagues who went to SNU in the U.S. So I just see talent."
He thinks that Korea's strong fundamentals and the structure that created the country's economic miracle will help it get through the economic headwinds.
The optimistic view comes despite a bleaker economic outlook following Bank of Korea (BOK) data, which showed the economy contracted 0.3 percent in the first three months of 2019 from the last quarter of 2018, due to falling private investment and exports. The contraction marked the biggest drop since the fourth quarter of 2008 when the economy declined 3.3 percent amid the global financial crisis.
Sargent also expressed high regard for Korean firms, whose continued innovation drive has resulted in competent products, helping them become leaders in the global market.
"Companies in Korea are very innovative, in terms of products and high yields," he said. "I have Samsung and LG products. I bought them because they were the best I could get."
Letting markets decide
The New York University economics professor suggested two things for Korea: let markets determine minimum wages, and strengthen research and development (R&D).
First, he voiced concerns about the Moon Jae-in administration's economic policies, particularly the income-led growth strategy, an initiative defined by an hourly minimum wage hike, which could worsen the youth unemployment rate.
Korea's 2019 minimum hourly wage was set at 8,350 won ($7.40), up 10.9 percent from 2018's 7,530 won, which was a 16.4 percent increase from 6,470 won in 2017.
He believes the government should be careful about increasing the minimum wage, especially when it means a company has to pay for low-productivity workers with little to no experience.
"Setting minimum wages when there's a new entrant, it's a very tricky matter," he said.
He pointed out that high minimum wages in countries in Europe had contributed to the youth unemployment crisis, because companies had to pay workers while shouldering the cost of training them, which benefits unskilled workers, not the company.
In his view, helping those in need by giving state welfare program is widely different from requiring firms to pay higher state-set minimum wages.
"Let's say you have some poor people you want to help. Is the minimum wage the best way to do it? It may not be," he said.
He said this was very different from saying companies should hire and pay a certain amount of wages, which should be determined by the market.
"Companies are then going to say they will not hire them. There were instances where that has not helped."
R&D, engine of growth
The second thing Sargent, concurrently senior fellow at the Hoover Institution, Stanford, recommended, is to push for innovation-led growth by beefing up research and development.
"You have to go look at the scientists and engineers and watch what they do," he said. "It's kind of mysterious. But new things are going to come out. Like when I was your age, I had no idea that you would be sitting there with computers. Nobody predicted that that was going to happen."
In that sense, innovation-led growth spearheaded by the Moon Jae-in administration ―- R&D in particular ―- is an initiative that should be fostered to achieve economic growth.
"Engineers and scientists, if you have enough of them and you let them go, they are going to produce new things. How? It's a miracle," he said. "You don't know what they are going to produce, but they are going to do it."
In the process, striking the right balance without choosing a winner in advance is a tricky yet often necessary task.
"Critics say how do you manage that then? So one stance is the government should foster general R&D but not to try to predict this is what is going to work," he said.
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