Korea reaches a major inflection point

(From left) Andy Xie, Antonio Fatas, Oh Suk-tae and Thomas Rookmaaker

• Published Jan 15, 2017 8:23 PM KST
• Updated Jan 15, 2017 8:23 PM KST

Without structural reforms, aging population, debt may cripple economy

Korea’s GDP is expected to remain below 3 percent in 2017 for the third consecutive year, raising fears the economy is heading toward a Korean “Lost Decade.” The Korea Times interviewed seven global economists to see where the economy is heading. The following discussion has been reconstituted based on separate interviews conducted through phone calls and emails from Jan. 2 to Jan. 13. ― ED.

Andy Xie, former Morgan Stanley economist

Sohn Sung-won, professor at California State University

Oh Suk-tae, economist at SG Securities Korea

Alicia Garcia-Herrero, economist at Natixis

Emily Dabbs, economist at Moody’s Analytics

Thomas Rookmaaker, director at Fitch Ratings

Antonio Fatas, professor at INSEAD

By Kim Jae-kyoung

Q: Do you think Korea’s economy has fallen into a structural low growth trap and will hardly grow over 3 percent down the road?

Thomas Rookmaaker

: Fitch expects GDP growth in the range of 2.5-3.0 percent in 2017 and 2018. This is still high compared with Korea’s peers, as the median for sovereigns rated in the “AA” category is 1.5 percent. Korea’s GDP growth is likely to gradually come down in the longer run. Potential growth is challenged by a number of factors, including “a new normal” for world trade, low productivity growth and, not in the least, the aging population.

Oh Suk-tae

: Korea’s long-term growth rate will continue to decline in the next 30 years due to population aging, but we cannot rule out GDP growth over 3 percent, especially in the next 5-10 years, during a ‘boom’ period.

Emily Dabbs

: We expect Korea’s economy will continue to grow below 3 percent over the following years as an aging population limits its growth potential. I believe Korea will likely grow at a slower pace than in previous years as it struggles with softer global demand and increasing competition from rivals in China. However, if the government can work with industry to bolster productivity, Korea may return to a stronger level of growth in the coming years. A government focus on improving productivity and innovation would provide a boost to growth potential, but the declining population from 2030 will dampen the gains.

Andy Xie

: Korea's labor force is not growing. Capital deepening is difficult. The only source of growth is productivity. Two-percent growth seems to be the norm for such an economy. Korea has to accept it.

Sohn Sung-won

: I think Korea will continue to be a slow-growth nation. It’s quite likely that Korea will follow in the footsteps of Japan. That’s why we have to do something. Japan made a lot of policy mistakes. We shouldn’t do that.

Antonio Fatas

: I think that growth will remain around 3 percent for the near future. That’s sounds to me like a good benchmark.

Alicia Garcia-Herrero:

Potential GDP growth above 3 percent is really very high for any developed economy. Korea, as any other country, could push growth up cyclically with the Bank of Korea’s help or with a fiscal stimulus but that will not raise potential growth in the medium term. Given very negative demographics, I very much doubt Korea can introduce policies to lift growth structurally to that level.

Q: What would be the biggest challenges to prevent the Korean economy from growing at a faster pace?

Sohn

: Demographics is the most serious problem facing Korea and the problem is worse than that of many of Korea's trading partners. Without a young and growing labor force, it is difficult to grow an economy. Ideally, productivity gains could pick up the slack, but it is unlikely.

Fatas

: I think that the Korean economy is in a difficult spot. Growth is slowing down, and unless innovation becomes a strong engine of growth across many sectors, Korea could end up in a state similar to many other advanced economies. Productivity in services is too low. Productivity of small firms is too low. The labor market is too focused on hours and not on efficiency.

Xie:

Exports are hampered by China's slowdown. Domestic demand is limited by high household debt. I don’t see a good way out in the short term. Korea has to prepare for the long game, which is to lay the groundwork for higher productivity growth. That requires a comprehensive plan to upgrade the labor force and invest in research to spawn the industries of the 21st century.

Inequality is the main source of unhappiness. In particular, when income and wealth are acquired through power, not through making the pie bigger, it is very dispiriting. It is important to associate income with contribution, not seniority, political power, or family background.

: Because of the low birthrate, the labor force is growing slowly and could stop growing all together pretty soon. Korea has been laggard in productivity growth among OECD countries. Structural problems — chaebol, the educational system and dependence on old industries — hamper gains. The sluggish global economy including China adds to slow productivity increases.

Rookmaaker:

Political uncertainty is likely to hold back economic activity by delaying investment and weighing on consumer confidence until a new president is elected. However, we do not expect political disruption to severely affect economic activity in the medium term.

Downside risks to Korea’s growth outlook are significant, especially in the event of a more-severe-than-expected downturn in China. Korea is the world’s sixth-largest exporter, and a large part of its exports ends up in China and other emerging economies, with 56 percent of the total remaining in Asia.

Q: Should Korea accept slower growth and focus more on distribution of wealth over growth? What kind of measures should we adopt to revive growth potential and achieve higher growth?

Garcia:

Policymakers should reform the production structure of the Korean economy basically restructuring heavy industry and moving toward a service-based economy by cutting dependence on exports. There is no other way out since subsidizing all sectors will prove too costly. For aging, Japan should be a clear example of what Korea should not replicate.

A number of Korea’s peers in Asia face similar demographic pressures, but Korea’s fertility rate is the lowest amongst 40 countries tracked by the OECD. Policy measures dealing with these structural issues, such as labor market reforms, could support GDP growth in the years ahead.

: Reform, reform and reform! Potential can be improved via reforms that facilitate competition and willingness to innovate in sectors that are less open to competition, in particular services. Otherwise 3 percent is the best and it has to be accepted.

Oh

: We should pursue two goals of growth and distribution at the same time. Again, we should pursue two different measures to boost the economy _ short-term macroeconomic measures like monetary and fiscal policy, and long-term structural measures like encouraging institutional and technological reforms.

Xie

: Most important is to wean the economy from debt dependency. Debt should grow in line, not faster, than nominal GDP. Trying to juice growth with debt will only lead to a crisis down the road. The South Korean government should no longer use household debt as a means to boost sagging domestic demand as record high debt could throw the Korean economy into another crisis if it is hit by external shocks.

Dabbs

: Policies aimed at addressing slowing productivity, such as labor market reform, tend to face public backlash and may have negative short-term impact. However, without some form of reform, Korea’s economy will likely slow. A number of Korean firms are already looking at how to differentiate themselves from cheaper rivals in China. Focusing on new technologies, such as ‘green’ cars in the automotive industry, will help distinguish the Korean brand in competitive export markets.

: Fortunately, Korea has room to stimulate growth by increasing budget deficits. Monetary policy has not been very proactive in supporting the economy. Many of Korea's key export industries are facing stiff competition from China. China will become a less important market for Korean products in the future. The backbone of Korea's past strength _ shipbuilding, automobiles, IT, chemicals etc _ is losing steam. Korea needs to focus more on service industries, including education, healthcare and finance.

: The low interest rate and loose lending policy are enticing people into debt to keep up. But, as income continues to fall behind, the high and rising debt load is depressing people. The right approach is to accept slower growth and stop using debt to juice up the economy. Instead, the government should focus on decreasing the cost of living, especially in housing and education.

There are many things to do to improve the quality of life. Better cities, better housing, better education, better healthcare, more art could make people happier despite 2% growth. Nordic countries are the happiest in the world. And they have low growth.

The only thing that could help is massive immigration, which I would discard as it would probably create other sets of problems although I would still favor moderate and selective immigration. In other words, Korean authorities need to start lowering their hopes for growth and focus on the quality of growth