Economy at crossroads: What lies ahead for Korea?
From left, economists Park Chong-hoon of Standard Chartered Bank Korea, professor Sung Tae-yoon of Yonsei University, and Oh Suk-tae of Societe Generale talk about the Korean economy and its future in The Korea Times roundtable discussion held Oct. 15 in Seoul. Korea Times photo by Shim Hyun-chul
Despite government efforts to reinvigorate the economy, uncertainties are growing larger than ever due to a myriad of internal and external challenges facing Asia's fourth largest economy. These include a sagging job market, sluggish investment and deepening trade tension between the United States and China.
On the occasion of its 68th anniversary, The Korea Times hosted a roundtable discussion with three economists, Oct. 15, to examine the current state of the economy and evaluate the Moon Jae-in administration's economic policies. ― ED.
By Park Hyong-ki
Is the Korean economy in a crisis, or about to face one?
Opinions varied among three local economists, who participated in a roundtable discussion hosted by The Korea Times' finance desk.
The three were Oh Suk-tae from Societe Generale, Park Chong-hoon from Standard Chartered Bank and Prof. Sung Tae-yoon from Yonsei University.
Over bowls of soup then cups of morning coffee, the discussion began with this question, which it is fair to say most people would want an answer to, given the difficult times the country is going through now and what is expected ahead.
Sung said, “We need an environment where companies can take risks and create new industries. And this will create new jobs.”
Sung said, “Yes, I think the real economy is in crisis,” pointing to a string of numbers that have been dropping, including domestic consumption and facility investment.
The other two economists, to the contrary, said Asia's fourth largest economy is going through a long period of “weakness and dullness,” but it is not in a crisis.
Oh said the economy is in a “soft patch,” a term commonly used by central bankers to express that the economy is weak and slowing down after periods of growth.
The three were in tune when Park of Standard Chartered Bank said Korea has definitely “lost its growth momentum, vibrancy and tenacity,” and is barely able to stay afloat, just relying only on capital-intensive semiconductors.
Park noted an index that forecast where the economy will be heading ― up or down. The composite leading indicator has been falling for a year and five months, according to the Organization for Economic Cooperation and Development. In August, it stood at 99.19, below 100, which indicates a further slowdown.
The specter of an economic crisis will loom larger, without doubt, as soon as the financial market feels the pinch from real estate, the bubble of which has the potential to pop and burst if policymakers do not “properly” deal with matters concerning soaring housing prices and household debt, the three economists said.
As Prof. Sung said, the financial market has been holding its ground better than expected, despite the real economy's weakness, Park agreed.
But Sung and Park said if the housing market “pulls the trigger,” it will not only cause a “shock but also ignite a crisis,” with Oh adding, “The economy stands at that crossroads” where the slowdown can become a crisis.
Options and solutions
So the panel tried to provide answers to the questions ― What can Korea do to prevent further weakness, a housing collapse and additional shocks to small self-employed businesses? Can Korea regain the glory of growing more than 3 percent as in the old days with its traditional industries?
Oh and Park said the government or central bank should not consider stabilizing prices of apartments and curbing rising household debt through monetary policies or rate hikes.
They said that would be a “dangerous move,” with Oh suggesting that the government should approach the problems and issues of real estate and debt separately.
Sung added the government should implement “distinct” housing measures in accordance with regional economic conditions.
Outside Seoul, most cities and provinces face apartment price decreases ― for instance, in Ulsan, Busan and Incheon ― as industries there such as shipbuilding, shipping and automobiles are suffering from a downturn.
Park said, “The economy has lost momentum and vibrancy, so the government needs to rapidly implement policies that can get the country out of the doldrums.”
Park agreed with Sung, but said it would be difficult to come up with a measure “targeting” specifically households, apartments and regions amid a down-cycle in the broader market.
Oh suggested the country should try to resolve the debt and real estate problems through “social” frameworks and policies, instead of economic ones.
Given that they have caused an imbalance and inequality to widen the gap between the rich and poor, it would be best to resolve them with a set of sociological solutions.
Sung moved on to point out that the government should also have approached the issue of income disparity through social measures to reduce poverty, not just by rushing to increase the minimum wage by 16.4 percent for 2018 and 10.9 percent for 2019.
All three said its intention was good, but it caused “unwanted shocks” to the self-employed amid the economic slowdown. It has further hurt the job market since employment in the sector accounts for 25 percent of the total. This is far higher than the OECD average of 16 percent.
While Park said the government should push forward with its key income-led growth policy, he agreed with the others that the pace of wage increases should be slowed down.
Jobs, jobs, jobs
Private investment, consumption and employment have been falling, and the economy has been counting on the exports of chips to advance 2 percent.
But concerns are growing as to how long chips can power the economy forward with little support from petrochemicals.
Oh said the country can forget about trying to maintain its growth at 3 percent, which all three agreed would be “impossible” after taking into account demographic changes, and a lack of new industries, innovation and regulatory reform.
Park said expansionary fiscal spending could do the trick of getting the economy out of the doldrums in the short term, but the question remains whether it can create jobs for the next generation.
Oh suggested, “The government and the central bank's policies should focus on job creation as in the U.S. and Japan.”
Oh suggested the time is ripe for the government and the central bank to devise and implement policies focusing on employment as in the United States and Japan.
The U.S. Federal Reserve takes into account job data probably more than inflation in its monetary policymaking, and Japan is “mostly about achieving full employment” than it is about growth, he noted.
Sung said the country needs an environment where small and big companies can “take risks” to create new industries because without them, the country cannot expect a high number of new jobs in the future.
Korea may not be able to do anything about the ongoing trade dispute between the U.S. and China, which is considered the biggest external risk to the country, but it certainly can do something internally such as devising and directing a policy that can help create more jobs for the young, the three economists said.