Korea needs to diversify growth routes
Services sector needs boost to restore growth momentum
By Kim Jae-kyoung
Antonio Fatas, economics professor at INSEAD
SINGAPORE ― Korea should diversity its growth route and cut its reliance on Samsung to keep the economy moving forward and ensure sustainable growth, according to a professor from the world’s leading business school.
“Samsung is a very successful company but I don’t think Samsung is going to be the future of South Korea,” said Antonio Fatas, economics professor at INSEAD, in a recent interview.
He pointed out that Korea is now moving toward an advanced economy and that now is the time to shift the focus of growth from manufacturing to services.
“I do not mean to say that Samsung cannot be important for the future,” he said. “What I meant is that manufacturing cannot be the only engine of growth in a country with the GDP per capita of South Korea.”
In 2014, Samsung Group’s sales reached 303 trillion won and total assets 623 trillion won, accounting for 20.4 percent and 42 percent respectively of the nation’s GDP of 1,485 trillion won.
He said Korea is lagging in services with little progress made.
“Shifting to the services sector is about establishing the conditions to improve productivity in those sectors,” he said.
“The country is ready to naturally shift, as demand naturally shifts toward different goods as a country grows,” he added, “so the key is openness to competition and innovation.”
According to him, history shows many countries see their growth stuck at around the 2 percent level when they face middle-income or middle-to-high-income traps.
“Two percent growth is okay but it doesn’t help you move forward much. I think South Korea is in that inflection point,” he said. “I think it is relevant and important to change some governance policies and openness.”
The economics professor said retail and finance are sectors that many countries protect from competition but they can make a country richer because people spend most of their income in those sectors.
“We don’t spend most of our income anymore in buying telephones and refrigerators. We spend a lot of our income in those sectors where there is competition,” he added. Through competition, “costs go down, productivity goes up and that’s what drives growth.”
Fatas, who uses South Korea as an example of growth in his lectures, said that to boost the services sector, both policymakers and politicians must reform their mindsets.
“Changing competition, changing regulations, changing labor markets typically would leave someone worse off,” he said.
“That makes politicians very reluctant to do what they have to do,” he added. “It’s not lack of knowledge.”
Asked what country Korea should benchmark, he said there is never a perfect role model because each country is different.
“In the case of Korea you will see that there is a large gap in productivity in many sectors. Those where the lag is bigger is where the country needs to set priorities.”
Political scandal
Regarding the political scandal involving President Park Geun-hye, the economist of Europe’s top business school’s Singapore campus, said the Korean people should not be too distracted by the scandal.
“That’s not where a country should be but unfortunately it is becoming very common. We see similar things in many countries in the world,” he said.
“The world is not looking at South Korea and saying what is happening there because it is just happening in so many other countries,” he added. “We live in a world where politics are very uncertain everywhere.”
Fatas, who has worked as an external consultant for international organizations such as the International Monetary Fund and the World Bank, said Korea needs to take a cue from Singapore to have a transparent, trustworthy political power.
“That’s what Singapore did extremely well for the last 50 years. It has always had the government that managed to convey that to the population in a way that was very credible,” he said.
He said Korea should pay more attention to China because the world’s second-largest economy is more vulnerable to crisis than it was in the 2008 global financial crisis.
“China surprised everyone during the 2008 crisis. It was one of the few countries that continued growing. That was achieved partly by the government actions _ increasing investment and creating incentives for increasing investment rates,” he said.
“However, I’m less optimistic about China. They now have less room to do the same. If there is another crisis tomorrow it will be difficult to do it. It will be healthy for China to rebalance away from investment toward consumption.”
Fatas believes that if Trump follows through with his pledges on economic policies, the world will experience trade disruptions and, in the worst case, a trade war, which he believes will deal a blow to the Korean economy.
He pointed out that if Trump raises tariffs on Chinese goods by 30 to 40 percent, it could result in a trade war and a serious political confrontation between the U.S. and China sending the global economy into another recession.
“Korea is the economy likely to be most affected by trade wars and increasing trade tariffs because you are more exposed and you need exports to keep your GDP at a certain level,” he said.
“Given the links in Asia between all the countries, it is very likely Korea is one of the countries that will suffer the consequences of any trade disruptions.”