INTERVIEW Korea should brace for global slowdown

This is the third in a series of interviews with economic experts to analyze the state of the Korean economy and make policy suggestions. ― ED.

Economist says minimum wage hikes should proceed at slower speed

By Kim Jae-kyoung

South Korea should prepare for a global slowdown as the world economy is set to enter an initial phase of downturn, a noted global economist warned, Monday.

“The global economic cycle has reached its peak and economies around the world, including China, Europe and emerging markets are slowing down,” Sohn Sung-won, professor of economics at California State University-Channel Islands, said in a recent interview.

“The only exception is the U.S., due to the Trump tax cut and government spending. Korea, a country with heavy trade dependence, is going to be adversely affected by the global environment,” he added.

Sohn Sung-won, professor of economics at California State University-Channel Islands

The warning came as Asia's fourth-largest economy is showing signs that its growth has slowed to a moderate pace due to sagging facilities investment and private spending.

According to the Bank of Korea (BOK), the nation's gross domestic product (GDP) grew 0.6 percent in the second quarter on a quarter-on-quarter basis, down 0.4 percentage points from the previous quarter.

He believes that Moon's overweight focus on wealth distribution over growth is the cause of the Korean economy losing growth momentum. He called for the Moon administration to maintain balance between the two equally important values.

“President Moon and the people must recognize that economics is all about a trade-off between growth and distribution,” he said.

“It is not always possible to 'have your cake and eat it too.' Since he was elected, promising an “equitable and inclusive” society, it is going to cost some growth.”

He said that the goal of an “equitable and inclusive” society is a very laudable goal even at the cost of some growth but Moon should take a step-by-step approach to achieve his goal.

“Some of the policies such as the minimum wage, weekly hours worked, taxes and other regulations should proceed at a slower speed giving the economy time to absorb the changes and catch up,” he said.

The U.S.-based economist said that he is not sure a heroic attempt should be made to blunt the current phase of the economic cycle at significant future costs.

“The income-led growth has some problems. Raising income, through higher minimum wages for example, does increase consumption,” he said.

However, he pointed out that its effect on capital spending and net exports are uncertain.

“In Korea, businesses have decided to hold back investments hurting economic growth. The effect on net exports is uncertain. Higher domestic consumption generally means weaker exports and stronger imports,” he said.

Lessons from Canada, Australia

He explains that studies have shown that open economies such as Korea's suffers from income- or wage-led policies.

He thinks that Canada and Australia are good examples.

“These are small, open economies. Empirical studies have shown that income or wage led policies in these economies do not work,” he said.

“Korea is similar to Canada and Australia in that we are all very export dependent. In the case of the two countries, income led policies did increase consumption, but hurt investment and net exports. The same thing could occur for Korea as well.

Despite worsening economic data, the Moon administration has reiterated it will not modify its income-driven growth strategy.

Against this backdrop, Sohn stressed that President Moon and his administration should realize that an income-led growth strategy is neither an ideal solution nor a panacea for the economy.

“This is not to say that the Moon administration should abandon the policy. It says the income policy leading to stronger economic growth and more jobs is not a sure thing,” he said.

According to the latest data released by Statistics Korea, only 5,000 jobs were added in July compared to the same period last year. It was the worst growth rate in eight-and-a-half years since January 2010.

For better policies, he urged Moon to make more efforts to seek ways to address long-term, structural issues in order to strengthen economic fundamentals and achieve his intended outcome of fair society.

“There is too much emphasis on short-term economic performance in Korea,” he said.

“Instead, the Moon administration should focus on long-term issues such as improving Korea's competitiveness and the goal of inclusive and equitable growth.”

Regarding the monetary policy, he said that the Bank of Korea should play a more helpful role.

“It has room to maneuver and the flexibility to support economic growth. The BOK can be a shock absorber in the foreseeable future,” he said.