KoreaToday Korean Economy Undergoing Paradigm Shift
By Kim Jae-kyoung
Staff Reporter
South Korea is undergoing a major paradigm shift from a developing economy to a developed one, ironically catalyzed by the global economic turmoil.
At home, there are several key factors indicating a major change in economic direction _ low GDP growth, a record-low savings rate and market-oriented finance. From the outside, the power shift from the U.S. to China is spurring Korea to face a new reality.
``It is a paradigm shift for Korea, which started in 2000 but has not yet been fully supported,’’ Market Force Company CEO James Rooney told The Korea Times. Rooney is also vice chairman of the Seoul Financial Forum.
``There is nothing to stop Korea’s potential growth rate from being the same as China’s actual growth rate if we properly engage ourselves,’’ he added. ``But we have to face the paradigm shift and take advantage of it ― not by competing with China, but by dancing on the back of China for her benefit and our own.’’
Since the end of the Korean War in 1953, the country has been one of the world’s greatest stories of rebirth as it transformed from a war-ravaged agrarian economy into a manufacturing powerhouse.
The transformation was the brainchild of government policies aimed at mobilizing personal savings and directing bank lending to aid the construction of industries and businesses. Korea’s transition toward a developed country, however, coupled with the global crisis is requiring a new direction for Asia’s fourth largest economy.
Structural Transition
First of all, the nation’s economic growth potential ― the GDP growth rate that can be achieved without fanning inflation ― is estimated to have fallen to the 3-percent level on the back of sluggish facilities investment amid the prolonged economic slump.
According to the Hyundai Economic Institute, the growth potential stayed in the 4 percent range until 2007 but appears to have fallen to near 3 percent. It said that if private consumption and corporate investment continue to remain in negative territory next year, it could dip to the 2 percent range.
This development suggests that the Korean economy is not merely undergoing an economic downturn hit by the global crisis but heading into a structural low growth stage as it has become a mature economy.
According to the Bank of Korea (BOK), following an average of 3.9 percent growth in the 1950s, Korea enjoyed high growth for nearly 40 years. The GDP growth rate averaged 8.4 percent in 1960s, 7.4 percent in the 1970s, 8.6 percent in the 1980s and 6.2 percent in the 1990s. But it plunged to 4.5 to 5 percent in the 2000s.
``The nation’s growth potential is around 3 percent and that is what the government should target,’’ said a global investment bank analyst, asking not to be named.
``Korea’s long-term growth potential will continue on a downward spiral due to contracting corporate capital spending and falling labor productivity,’’ he added.
Secondly, Korea has become the country with the world’s lowest savings rate. Its household savings rate is estimated to have dipped below two percent last year, the lowest level in history. The country boasted one of the world’s highest savings rate only a decade ago.
The nation’s savings rate was even below that of Japan (3.1 percent), which has maintained an ultra-low interest rate policy over the past few decades. The household savings rate refers to the percentage of savings to disposable income.
After peaking at 23.2 percent in 1998 when the financial crisis shook the country, the savings rate slid to the 2 percent range in 2002. It rebounded to 5.7 percent in 2004 but dropped again to 2.3 percent in 2007 and has since been on a downward trend.
The plunge in the savings rate came as household debt and spending grew much faster than income growth. Households’ ability to save has weakened over the years, as they borrowed heavily to spend on private education and real estate investment.
`` The rate has been declining in line with Korea’s emergence as a developed country, reflecting the growing responsibility of Korean people to become consumers of goods and services,’’ Rooney said.
``Korea is shifting from a manufacturing-driven, capital-investment-driven economy to a service-driven, consumption-driven economy. This shift is inevitable,’’ he added.
Another big transition is the economy and financial market shifting from ``state-controlled’’ to ``fully market principle-oriented’’ or ``shareholder-centered,’’ which is well manifested in President Lee Myung-bak’s understanding of financial markets and the economy.
Earlier this year, Lee called for replacing the term ``financial institution,’’ widely used over the past decade to refer to banks and other firms in the financial sector, with ``financial services company.’’
He believes that the old term is a legacy of ``state-controlled finance.’’ He said it was not the right term any more to refer to local banks and other firms in the industry that are now seen as a truly profit-seeking organizations.
External Forces
China’s rise in the global scene is an external force compelling Korea to overhaul its economic paradigm. Over the past year, the balance of global power has shifted to the East from the West, with U.S. hegemony being eclipsed by the rise of China. This transition is seen as a harbinger of the collapse of Pax Americana and the rise of Pax Sinica.
No one doubts that China will become a major force on the global scene. It is not a matter of choice, but a matter of time and destiny. Global economists expect China to overtake the U.S. in 30 years.
Since Korea is sandwiched between the U.S. and China, the power shift can be both a blessing and a curse, so every Korean entity ― the government, businesses or individual persons ― should brace for the rise of China. Depending on how it copes with this, Korea’s future could turn out very differently.
Korea is sitting right next to China, which cannot afford to and does not need to, allow its domestic economic development to be derailed by restructuring problems that are occurring on the other side of the Pacific Ocean.
While China’s exports to the U.S. may decrease, it would only oblige China to focus more energy on the healthy development of its domestic market and other attractive export markets. Korea has every reason to participate.
Two-Pronged Approach
The ongoing paradigm shift has generated a number of problems here. It has lowered economic growth potential by reducing savings rates and corporate investment, while making so-called ``pariah capitalism’’ more prevalent.
In addition, it has deepened the economic polarization between Seoul and the non-capital area, while widening the gap between the rich and poor, which is intensifying social conflict.
Market experts said that in order to tackle lingering problems and become a global leader, Korea should face the paradigm shift by adopting a two-pronged approach ― internal and external.
Internally, they said that Korea should undergo a fast transition to a new economic model through large-scale reform measures in such areas as the service industry, labor-management relations and capital markets.
``From Japan one century ago to the Asian Tiger economies 50 years ago and China 30 years ago, the export-orientation model has made fast development possible,’’ former Morgan Stanley Asia economist Andy Xie said.
``The problem with the model today is that it is crowded. Developing economies already account for 30 percent of the global economy at current prices. The export model cannot thrive because of a shortage of customers,’’ he added.
The shift is calling for Korea to undertake policy steps to boost productivity and move to higher value added businesses, and let the lower value added businesses, especially in manufacturing shift elsewhere.
Externally, Korea should reform its export structure to capitalize on China’s rise. The most critical thing for Korea to achieve, both now and for the next one hundred years into the future, is to actively integrate itself into the Chinese economy through numerous forms of economic activity, including manufacturing, logistics, services, finance, tourism, education, and culture among others.
Choi Jung-kiu, head of global strategy at Standard Chartered, said that Korea should start to think ahead to become a major force on the global scene after the ongoing crisis. He pointed out that the country should develop competitive sources or future industries for the post-crisis era when China’s importance will become much bigger.
``This is a great time for Korea to create a winning platform for the future by removing regulations and increasing market competitiveness,’’ said Choi.
``Korea should identify key industries. In addition, the government needs to think about whether to allow further industry consolidation to build better economies of scale to compete against China,’’ he added
Rooney said, ``The traditional economic engines of Korea will continue to be valuable as long as we keep investing in them and building them. But they cannot be the new growth engines as we are already well advanced in these matters, and should concentrate our development efforts on areas where we are less advanced or less penetrated in outside of Korea, like the ones that I mentioned above.’’