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"Only when the tide goes out do you discover who's been swimming naked," is a famous quote by Warren Buffett, the world's greatest investor, about how receding economic currents can reveal the vulnerabilities of those who previously appeared to be floating on success. With Korea's export machine sputtering, is the country about to be exposed as naked?
For the last few years, Korea has enjoyed relatively good economic growth because of its strong export performance. Companies benefitted from a weak won in overseas markets despite accusations by some that the government was engaged in currency manipulation.
Korean exporters, such as Samsung Electronics and Hyundai Motor, made great strides in making their products cool and appealing to global customers. The smartphones and cars that the country produced became known for their excellent quality and affordable prices, which is one reason why Samsung, and not Sony, now reigns supreme in consumer electronics, for example.
Finally, Korea engaged in a flurry of negotiations to conclude preferential trade agreements with most of its major trading partners, which expanded existing foreign markets.
Korea's robust export performance, however, has masked deep domestic problems that are now coming to the fore as shipments overseas start to stumble. The challenge for Korea is whether it has the ability to tackle them.
The export slowdown is due to several reasons. One is that global demand is weakening in several of Korea's major markets, including China and Europe. Another reason is that the Japanese yen is more in favorable alignment with the value of the Korean won as a result of Tokyo's monetary easing. Japan is no longer the expensive place it once was as shown by rising tourist numbers and its products in premium categories are getting cheaper overseas.
Korea's traditional trade rivalry with Japan could intensify if the Trans-Pacific Partnership, which eliminates significant regional tariff barriers, is implemented since Tokyo is a treaty member and Seoul is not.
Meanwhile, Chinese products are also snatching market share from Korean competitors as their quality improves and Beijing throws money at strategic industries. Xiaomi's plummeting of Samsung in China's smartphone market could be a taste of things to come. Even if Tsinghua Unigroup fails to its bid to buy Micron in the U.S., it is clear that China is gunning for Korea in such vital sectors as semiconductors. Just as in regional power politics, Korea is becoming "the shrimp among the whales" in business and its prospects could worsen if global demand slows further.
Given the uncertain export outlook, what can Korea do? One choice is to promote domestic demand. A recovery in the housing and construction sectors has improved the chances of increased consumer spending somewhat. But nearly stagnant wage growth and stratospheric household debt will keep any sustained recovery firmly in check.
There are suggestions that Korea can regain domestic growth momentum if the power and market dominance of the chaebol are curbed to promote the emergence of small and medium-size companies. In theory, that sounds right. But the problem is that the SME sector is also heavily indebted and inefficient to boot, with excess capacity. This situation is related to Korea's poor productivity rates, particularly in service industries as retail and hospitality, which are among the lowest in Asia.
The only serious ways to boost domestic demand and increase productivity would be structural reforms such as paying women better wages (now the lowest among the rich OECD countries) to encourage more of them to enter the workforce and attracting more immigrants to counter Korea's aging population, which threatens a further decline in productivity.
In the meantime, the government could turn on the spending spigots, which it can afford to do since the government debt ratio is among the lowest in the OECD. The budget deficit this year amounts to about 3 percent of gross domestic product. The government should perhaps give tax breaks to companies that hire more women and pay them decent salaries.
The Bank of Korea should also stick to its current policy of low interest rates, which are now at a historic low of 1.5 percent. Low interest rates are needed to keep the won competitively weak and counter the effects of a growing current account surplus, which would normally increase the value of the Korean currency. Korea can afford to maintain a low interest policy and weak currency since the country no longer relies on short-term foreign-currency loans as it once did before the 1997 Asian financial crisis.
Saving Korea from embarrassing exposure will thus entail a combination of long-term structural reforms, particularly in the labor market, with short-term measures, mainly relaxed fiscal and monetary policies that will cause the won to weaken even further to ensure export competitiveness.
John Burton, a former Korea correspondent for the Financial Times, is now a Seoul-based independent journalist and media consultant. He can be reached at john.burton@insightcomms.com.
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