By Richard Dobbs
As one of the world’s preeminent export-led manufacturer, Korea faces a formidable challenges from the problems besetting the world’s developed economies.
The International Monetary Fund, not given to hyperbole, has warned that the United States and the Eurozone could fall back into recession.
At the heart of the problem facing developed countries such as the U.S. is the stubbornly high level of unemployment. But the government of developed countries seem powerless when addressing unemployment.
Korea could be part of the solution for the world’s developed economies. Korea has the capital and capabilities to help address unemployment through an infrastructure investment program to rebuild the aging infrastructure of the developed economies.
Indeed Korea is one of the best placed countries for this and could turn the problem facing the developed economies into an opportunity, while at the same time helping speed the global economic recovery.
Of all the major large economies, the employment challenge is most acute in the United States. During the postwar period, U.S. recessions and recoveries were mostly a matters of business cycles. When demand recovered and GDP growth resumed, employers hired again.
About 6 months after the economy recovered, employment returned to its pre recession peak. The relationship between economic recoveries and employment recoveries was predictable. But for the past two decades, this pattern has been broken.
Now, recessions have become periods of accelerated structural change “jobless recoveries” that result in years, not just months, of unemployment.
For affected workers, this leads to lower long-term earnings, more limited job opportunities, and even poorer health outcomes.
Jobless recoveries also place a significant burden on society, potentially expanding the pool of difficult-to-employ people.
There are many reasons for the jobless recovery now unfolding in the United States and other advanced economies, including the changing responses to recessions by employers, the slow growth of new enterprises, and poor labor mobility as a result of dual career families and negative equity. Indeed, problems in U.S. job creation were evident before the 2008 recession began. In the years from 2000 to 2007, the United States recorded its weakest employment growth for any comparable period since the Great Depression.
Research by the McKinsey Global Institute suggests that this weak job growth will be the “new normal” unless the U.S. makes fundamental structural changes.
Indeed only in our most optimistic job growth scenario is the U.S. able to create the 21 million new jobs needed to regain normal levels of unemployment — and this only by 2020.
This jobless recovery will act as a drag on consumption and investment, and could result in politicians overreacting by introducing tariffs. This is all bad news for those countries that have grown on the back of exports to advanced economies, and Korea in particular.
In most of the major large economies, the employment challenge is one of the most acute But governments are on the back foot when it comes to addressing unemployment.
Monetary policies have reached their limits with interest rates already negative in real terms in many countries, and further fiscal stimuli are looking harder given current levels of government debt.
So what could power the growth needed by the U.S. and many other advanced economies?
The engine for the last two decades, consumer spending is constrained because households need to deleverage.
Public spending is constrained by high levels of government debt. Private investment therefore needs to be a key driver of GDP growth.
The challenge is to get businesses to invest when faced with global uncertainty and weak consumer demand. MGI believes that the solution is to create attractive conditions and incentives for business to invest in long-term projects that need not rely on near-term consumer spending. Infrastructure projects are a prime example.
The degraded infrastructure in many developed economies-everything from airports, ports, bridges, power generation and transmission to railroads and telecommunications-is now a drag on long-term growth.
The American Society of Civil Engineers, for instance, estimates that the United States needs to spend $2.2 trillion over the next five years to bring its existing infrastructure up to “good” condition.
A number of European countries such as the U.K. face a similar challenge. Addressing the infrastructure backlog would create the types of jobs the economy needs — job losses were most acute in the construction sector. MGI’s rough analysis suggests that an additional $200 billion infrastructure expenditure per year in the U.S. will create around 6 million jobs, directly or indirectly.
We believe five areas should be priorities as they create jobs directly and unlock potential in other areas of the economy.
●Upgrade power infrastructure. This would enable the emergence of clean energy sources and replace aging infrastructure. Development is necessary in generation, transmission, and distribution.
●Improve roads and urban transit systems. Congestion in major metropolitan areas is a drain on productivity, contributes to pollution and health problems, and distorts household and business real-estate decisions. Adding targeted new capacity to roads and public transit systems, and using new pricing technologies to balance supply and demand during peak times, can reduce these pressures.
●Expand broadband access. This can help companies to set up remote IT, sales, and administrative operations and employ virtual workers across the country. Companies are finding that such centers can be cost competitive with offshore centers.
●Modernize the air transportation system. Even now-a time of slow growth-air transportation in the United States and Europe is plagued by delays, inefficiencies, and some capacity bottlenecks. There is a need to invest in next-generation air transportation systems which could significantly expand air space capacity and improve safety. In turn this would lower the cost of air freight, as well as business and leisure travel.
●Upgrade ports. This would include creating deep-water access in East Coast US ports to take advantage of the next-generation of high-capacity container ships. There is also a need to increase the efficiency of West Coast ports –– particularly relative to Asian ports –– and expand the links necessary to move goods into and out of U.S. ports.
Enacting a successful infrastructure program will require improvements in the regulation and oversight of infrastructure projects.
In the United States, for instance, it takes an average of more than eight years to complete the planning, permissions, and final design of a large-scale, federally-funded transportation project-but only three years to build it.
Streamlining the regulatory permitting process and creating flexible bidding in which companies can suggest alternative specifications will be essential to getting projects into construction faster. But the real challenge is around money and capabilities. Given debt crisis, most governments simply don’t have the money to spend on the required investment.
And the players operating the U.S. infrastructure lack some of the required capabilities. The creative alternative to accepting slow decline is, instead, to tackle the political challenges –– heated debates over foreign ownership or rates or return, for example –– and spur a new round of privatization.
And this is where Korean corporations and the government come in. Korea has a strong balance sheet in both the public and private sector, and world class capabilities to build and operate infrastructure.
For countries such as the U.S., Korea is a much more neutral investor and operator, compared with other players from Asia and the Middle East. Korean consortiums could take over, rebuild and operate existing facilities and provide the investment required to build new ones. Indeed, we believe that Korean consortia could attract additional, funding as our conversations with many international investors such as pension funds suggest that they are interested in investing in infrastructure in advanced economies. Our conversations indicated that advanced economies could raise $250 billion to $500 billion of equity capital over the next three years from these sources, which can be leveraged up with debt finance.
With a few notable exceptions, Korea has been missing in action when it comes to the problems of the advanced economies. It is time for Korea to take the lead in developing an infrastructure investment program to get their economies going again.
Doing so is not just socially responsible behavior by Korea –– it is in Koreas self-interest too.