Hank Ahn serves as commissioner of Invest Korea, the state investment vehicle affiliated with the Ministry of Knowledge Economy.

By Hank Ahn

Commissioner, Invest KOREA

Without a doubt, investment functions as an engine for economic growth. Yet, low growth is stunting the Korean economy due to squeezed investment.

Growth potential is determined by investment, population increase and productivity. But as the enhancement of the latter two hinges on the long-term, investment is crucial for growth potential in the short-term.

Korea’s potential growth recorded 7.8 percent in the 1980s but dropped to 6.3 percent in the 1990s. It has now fallen further to about 4 percent. The cause of such a rapid decline reduced investment, stagnant employment growth and slow productivity.

Korea’s fertility ratio has dropped continuously, recording 1.15 percent at the end of 2009. The productivity growth rate is about a third that of the U.S. and Japan.

Given this trend, Korea’s most pressing issue with regard to her continuous and sustainable economic growth is propelling investments. It is notable, however, that Korea’s total domestic investment of GDP and facility investment have been declining due to various regulations and a rigid labor market resulting from combatant trade unions and excessive employee protection.

To increase growth potential, regulations of all varieties must be lifted and the flexibility of the labor market must be enhanced. In particular, we must make an all-out effort to attract foreign direct investment (FDI).

Korea’s total FDI index, which is higher than the OECD average and that of the U.S. and the U.K., reflects Korea’s restrictive FDI environment.

This notion is confirmed by the 2010 annual Fraser Institute report on the economic freedom of the world, in which Korea ranks 37th. Hong Kong, Singapore, Taiwan and Japan rank 1st, 2nd, 22nd, and 24th, respectively.

Among the areas compared, Korea lags far behind her neighbor countries when it comes to freedom in government size, labor market regulations and business regulations.

In other words, Korea must reduce the size of government, especially with regard to government expenditures, taxes and state-owned-enterprises.

When foreign businesses consider Korea as an investment destination, they don’t think hard about whether they should invest here. They compare the pros and cons of investing in Korea and her adjacent countries, such as Hong Kong, Singapore, Taiwan, China and Japan.

Likewise, Korea is competing against neighboring countries in inducing FDI, not against such far-off countries as Brazil, the U.K., South Africa and India.

Many things factor into the investment decisions of foreign businessmen, but tax rates and property prices matter most as good indicators of economic freedom.

For instance, the corporate tax rate in Singapore and Taiwan is just 17 percent. In Hong Kong, it’s 16.5 percent.

In this context, Korea needs to reduce her corporate tax rate from the current 22 percent to 20 percent, as we promised in 2009.

As Korea feels the financial and economic shockwaves from Europe and the U.S., it is important to note that economic freedom lets the economy cope better with outside shocks that drive the business cycle.

In fact, the Fraser Institute report suggests that more economic freedom reduces unemployment. We must remember that this is, after all, the first-order goal of a country, particularly in the wake of an economic tsunami unleashed from across the Pacific Ocean.