Seoul can ill afford to sit and watch
If the much-talked-about summit between President Park Geun-hye and Japanese Prime Minister Shinzo Abe becomes a reality, historical and territorial issues will likely top their agenda. Of equal, if not bigger, importance for people's daily lives, however, may be economic matters ― especially issues related to trade.
The problem is that, unlike in the political arena, President Park can hardly call for Prime Minister Abe to make concessions or compromises on economic issues. The issues are largely decided by markets on the basis of the two countries' competitiveness.
Of the greatest concern to the government and businesspeople is the plunge of the Japanese yen and the relative surge of the Korean won. At a time when 55 of the two countries' top 100 export items are in direct competition, the steep appreciation of the Korean monetary unit constitutes a considerable burden on the nation's exporters, as it erodes their price competitiveness.
The biggest culprit is "Abenomics," one of whose three major pillars is the Japanese version of the U.S. Federal Reserve's quantitative easing policy. As Tokyo is unlikely to discontinue supplying liquidity ― part of its efforts to stem deflation and end the country's two-decade-long recession ― the yen's further slide is inevitable.
Korea's rapidly swelling current account surplus also pushes up the nation's currency to undesirably ― and undeservedly ― high levels.
Unfortunately, the surplus is the result more of insipid imports than robust exports. The recession is making the problem worse by prompting sluggish investment in plants and equipment. Add to this the recent series of corporate insolvencies of midsize chaebol, such as Tongyang, STX and Dongbu, and weak economic fundamentals marked by snowballing household debts and a worsening fiscal situation. One cannot help but recall the two previous economic nightmares, in 1997 and 2008.
What can, and should, Korea do?
The Park Geun-hye administration will need to deploy all policies, financial and industrial, to manage the surplus to an optimal level by maintaining export competitiveness while boosting domestic demand. The government should regulate sudden flows of foreign capital in and out of the country as far as international regimes allow. Seoul also needs to pay greater attention to financial diplomacy and should consider changing the exchange rate system.
A more fundamental solution lies in sharpening the competitive edge of made-in-Korea products, especially up-to-date parts and materials made mainly by small- and midsize enterprises, in addition to the finished products of large businesses.
Korean manufacturing firms should learn from the examples of their Japanese competitors, who overcame the brutal appreciation of the, first by shaving production costs, relocating abroad and turning to overseas procurement, and finally by accumulating state-of-the-art manufacturing technology.
The government and the private sector should cooperate closely to overtake their Japanese rivals in productivity and creativity. All this can happen with the government's strong leadership. Temporary bolstering of domestic demand through a debt-financed housing boom is certainly not the answer.
Korea's economy stands at a crossroads now. Sadly, the government's policies do not reflect an awareness of this fact.
If the much-talked-about summit between President Park Geun-hye and Japanese Prime Minister Shinzo Abe becomes a reality, historical and territorial issues will likely top their agenda. Of equal, if not bigger, importance for people's daily lives, however, may be economic matters ― especially issues related to trade.
The problem is that, unlike in the political arena, President Park can hardly call for Prime Minister Abe to make concessions or compromises on economic issues. The issues are largely decided by markets on the basis of the two countries' competitiveness.
Of the greatest concern to the government and businesspeople is the plunge of the Japanese yen and the relative surge of the Korean won. At a time when 55 of the two countries' top 100 export items are in direct competition, the steep appreciation of the Korean monetary unit constitutes a considerable burden on the nation's exporters, as it erodes their price competitiveness.
The biggest culprit is "Abenomics," one of whose three major pillars is the Japanese version of the U.S. Federal Reserve's quantitative easing policy. As Tokyo is unlikely to discontinue supplying liquidity ― part of its efforts to stem deflation and end the country's two-decade-long recession ― the yen's further slide is inevitable.
Korea's rapidly swelling current account surplus also pushes up the nation's currency to undesirably ― and undeservedly ― high levels.
Unfortunately, the surplus is the result more of insipid imports than robust exports. The recession is making the problem worse by prompting sluggish investment in plants and equipment. Add to this the recent series of corporate insolvencies of midsize chaebol, such as Tongyang, STX and Dongbu, and weak economic fundamentals marked by snowballing household debts and a worsening fiscal situation. One cannot help but recall the two previous economic nightmares, in 1997 and 2008.
What can, and should, Korea do?
The Park Geun-hye administration will need to deploy all policies, financial and industrial, to manage the surplus to an optimal level by maintaining export competitiveness while boosting domestic demand. The government should regulate sudden flows of foreign capital in and out of the country as far as international regimes allow. Seoul also needs to pay greater attention to financial diplomacy and should consider changing the exchange rate system.
A more fundamental solution lies in sharpening the competitive edge of made-in-Korea products, especially up-to-date parts and materials made mainly by small- and midsize enterprises, in addition to the finished products of large businesses.
Korean manufacturing firms should learn from the examples of their Japanese competitors, who overcame the brutal appreciation of the, first by shaving production costs, relocating abroad and turning to overseas procurement, and finally by accumulating state-of-the-art manufacturing technology.
The government and the private sector should cooperate closely to overtake their Japanese rivals in productivity and creativity. All this can happen with the government's strong leadership. Temporary bolstering of domestic demand through a debt-financed housing boom is certainly not the answer.
Korea's economy stands at a crossroads now. Sadly, the government's policies do not reflect an awareness of this fact.
