By Kim Tong-hyung
Even as Korea has cemented its status as an export juggernaut in recent decades, there has always been a sense of uneasiness among businessmen and policymakers about the nation’s place in Asia’s economic future.
Their concerns are justified by a glimpse of the map, which shows the country squeezed between two regional giants that move and shake the world economy.
Above is China, one of the massive engines driving global capitalism, whose low wages allow it to compete ruthlessly on cost and is quickly earning its stripes as a provider of complex products. On the right is Japan, an old industrial power that continues to set the standards in technology and manufacturing savvy.
Korea has done an admirable job of holding its own, managing double-digit export growth for much of the past decade. But the latest financial crisis has provided a true test to the mettle of the country’s export-dependent economy. And with statistics in recent months suggest that Korea’s export competitiveness may be slipping, pessimists are raising fears that the inevitable has just started becoming reality.
One of the high-profile skeptics has been Korea’s top central banker, Kim Choong-soo, who at a recent seminar in New York claimed that the country must brace for a prolonged period of subdued growth. While Kim’s main concern was with the country’s increasingly top-heavy population, he also observed that manufacturers are failing to depart from their labor-intensive days and make the required jump in productivity.
``Korea’s economic growth is anticipated to slow down in the mid- to long-term on declining birth rates and an aging population,’’ the Bank of Korea (BOK) governor said in a guest lecture given to the Asia Society.
``Whether Korea can avoid the middle-income trap depends on its ability to achieve qualitative growth rooted in improvements to productivity,’’ he added, stressing that the country needs to put more focus on maximizing efficiency and improving the quality of its industrial talent.
Not that anyone expected Kim to be a source of glowing optimism, when the heady mixture of negatives rattling the country from inside and out has forced the BOK to sit on its hands and waste away its monetary credibility.
Despite high inflation and the acute squeeze it has put on living standards here, the bank has been keeping interest rates at bay for 10 straight months and counting, as higher prices have been coupled with subdued economic activity.
The murky economic climate continues to expose Korea’s vulnerability as a one-trick export pony. The country’s growth in exports has pulled back sharply in recent months due to worsening conditions in major markets like Europe, North America and China. Consumers are unable to pick up the slack as their finances continue to decay on spiraling debt and stagnant wages.
And the massive gulf between the richest and poorest households appears to have cut off an important recovery route for the economy.
Kim’s comments were backed by a report by the LG Economic Research Institute (LGERI), which predicted Korea’s pace in annual gross domestic product (GDP) growth will hover in the low-3 percent range in the next five years.
``We expect the average economic growth until 2016 to come in at 3.2 percent. The number of people in their 30s and 40s, who are the core of the labor force, will diminish by 1 percent every year. The trade surplus will diminish and the investment in equipment and facilities and the housing market will continue to be sluggish,’’ LGERI said.
``The world economy will grow at an average of 3.1 percent during the period, a sharp pullback from the mid-5 percent levels show in the mid-2000s, as developed economies continue to struggle with debt problems.’’
Too improve the long-term prospects of its economy, it’s critical Korea finds a way to boost incomes more broadly, to help small- and medium-sized businesses and inspire entrepreneurship. However, the country’s economic policy continues to cater toward big businesses that make it ups export machine.
This has observers expressing alarm over the series of economic data that shows Korea is being pressed harder in global trade by its overbearing neighbors. According to official figures, the country’s share in global exports has reached a virtual standstill, measured at 2.5 percent in 2000 and 2.8 percent in 2011. Its gap with China expanded from 1.1 percentage points in 2000 to 6.5 percentage points last year.
And while Korea has managed to close in on Japan in global export share in the past couple of years, the distance between the two countries is expected to widen again as Japan moves further away from its earthquake, tsunami and nuclear crisis.
``While the country’s competitiveness in exports has improved in the past 10 years, we still aren’t as good as Japan. And there are an increasing number of areas where China is beginning to surpass us in competitiveness,’’ said Lee Bu-hyeong, an economist from the Hyundai Research Institute (HRI), a private think tank run by one of Korea’s true export heavyweights, Hyundai.
``It’s alarming that in crucial sectors like machinery, automobiles, high technology and information technology, Japan continues to broaden the distance with us, while China continues to reduce the distance.’’
In a recent HRI report, Lee picked seven major export items shared by Korea, Japan, and China ― steel manufacturing, steel products, machinery, information technology, automotives, shipbuilding and precision equipment ― and analyzed the comparative strengths of the countries in each area.
HRI’s ``trade specialty’’ index for Korea in these products came in at 0.34 for 2011, lower than Japan’s 0.45. The figure for China would have been a minus 0.07 in 2000, but measured 0.15 in 2011. A reading between 0 and 1 signals strong international competitiveness, while a negative reading indicates the opposite, HRI said.
``China has been catching up quickly in areas like information technology and precision equipment and is already more competitive than Korea in producing steel, machinery and ships. Korea has been failing to reduce its competitive gap with Japan in areas other than technology,’’ Lee said.
``By region, Korean companies are struggling to compete with Chinese rivals in the Japanese market, and lagging behind both Chinese and Japanese competitors in the U.S. market.’’
Korea can ill-afford to punch below its weight in exports, when consumers are breathing heavily on the ropes. A study by senior BOK economists warns that the historically high levels of household debt are beginning to pose a serious threat to the country’s financial stability and erode the fundamentals of its economy.
According to the BOK, Koreans currently owe more than 912.9 trillion won (about $802.4 billion) to banks, credit card companies and secondary lenders. When combining the borrowings by the self-employed and non-profit organizations and the measurement in non-interest paying debt, the consumer debt mountain has long exceeded one quadrillion won to match an entire year’s GDP.
The public’s borrowing binge has been driven by speculative demand in property. However, millions of homeowners have found themselves trapped in negative equality after the housing market crashed with the Lehman Brothers in 2008. And it doesn’t help that high unemployment and stagnant income, which continues to lag behind the pace of inflation, have devoured take-home pay.
In continuing to put growth before price stability, the BOK has been rendered itself powerless in halting the damage to savings and spending capabilities and rescuing households sinking under the sea of debt.
The alarm on household debt is blaring even louder as experts express worries on the ``quality’’ of debt families have been taking on. While mortgages and other housing-related loans drove personal indebtedness for most of the past decade, BOK statistics in recent months show that more people are being forced to borrow to finance their day-to-day living.
More than 60 percent of all Korean households are in debt, with the average-income earner measured owing 42 million won last year, according to the BOK.