Korea needs political coalitions against China

This is the eighth in a series of interviews with international experts on Korea giving advice to President Moon Jae-in on how to overcome challenges and create a better future for the Korean people. ― ED.

By Kim Jae-kyoung

SINGAPORE ― President Moon Jae-in should seek ways to unite forces with other big economies in Asia to deal with the growing influence of China, said Antonio Fatas, professor of economics at INSEAD.

His advice comes as China, the world’s biggest consumer market, is taking the leading role in reshaping economic integration in Asia.

“China is trying to increase its influence over Asia given the lack of leadership of the United States,” Fatas said in a recent interview.

“Korea and other larger economies in Asia need to find ways to build political coalitions that can be used against the demands of China.”

He pointed out that China has the ability to push others in negotiations, either economic or political.

“Size matters in these negotiations. China negotiating with each economy in Asia means they tend to dominate those conversations,” he said.

“I am thinking of the parallel of the EU that has a voice in international negotiations because of its size. I do think that any process of economic integration and creating supranational institutions and dialogue in Asia will reduce the power of China.”

His remarks came as a response to questions on how Korea can handle China’s economic blackmail against the deployment of the U.S. Terminal High Altitude Area Defense (THAAD) system.

Fatas, who uses South Korea as a case study for economic growth in his lectures, said that it is time for Korea to revamp its economic model to adapt to the era of the Fourth Industrial Revolution.

He pointed out Korea is one of the most successful economies of the past 40 years but the growth engines of the past need to be modified and in some cases replaced.

“South Korea’s growth has slowed down revealing the end of the previous growth model,” he said.

“The power of those who have made the previous miracle possible needs to be reduced to ensure the forces of innovation and renewal are strong enough.”

In his view, what the country needs is an emphasis on innovation, a pro-competitive business environment that allows startups with small ideas to challenge the position of the large Korean companies.

A change of mindset toward no complacency and reliance on global competitive forces are also elements necessary for Korea to ensure stronger sustainable growth, he said.

Shifting to services-based economy

Fatas called for the Moon administration to draft long-term plans to transform the economy into a services-based one by facilitating competition and establishing the conditions to improve productivity in those sectors.

He said in order to create an ecosystem to foster more internationally competitive players fit for the 21st century, the new government should focus on shifting education toward innovation and away from building traditional skills.

“In the past, capital and talent have been allocated to the large manufacturing companies, partly through explicit government policies,” he said.

“As a result, the service sector in Korea employs fewer people than in other similar countries, and has lower productivity. This needs to be reversed through policies that encourage talent and capital to move into these sectors.”

The Singapore-based economics professor said shifting to the services sector will help Korea solve the jobless growth problem.

“Jobless growth is the outcome of a manufacturing sector that keeps replacing labor with capital as in other advanced economies, he said. “Jobs should be developed in the service sector.”

As for renegotiation of the free trade agreement with the U.S., Fatas advised Moon to take a strategic approach to avoid any retaliation.

“What Korea cannot do is take economic actions that are seen as against American interests. Obsession with current account surpluses and the value of the currency could lead to potential retaliation by the U.S.,” he said.

“A shift toward emphasis on internal consumption would be welcomed by the U.S.”

To inject new vigor into the economy, Fatas, who has worked as an external consultant for international organizations such as the International Monetary Fund, suggests Moon focus on bolstering domestic demand.

“In the short term, Korea faces a positive global economic outlook and does not have any massive macroeconomic imbalances,” he said.

“If any, it continues with strong current account surpluses. A shift toward increasing spending if economic conditions get weaker would be feasible and desirable.”