Commendation Award Korea should foster more innovative services industry

By Min Sung-jun

In the last half-century, South Korea has undoubtedly served as a model for developing countries, with commendable economic growth enabling it to become the 11st largest economy in the world with a nominal GDP of $1.54 trillion.

This remarkable growth has been largely fueled by family-owned conglomerates called “chaebol” and open-market policies that have given South Korea comparative advantage in global markets. However, these very own reasons that led the so-called “Miracle on the Han River” is slowly emerging as a major obstacle to South Korea's sustainable economic development with the economy stagnating since the early 2010s.

Giant conglomerates such as Hyundai and Samsung are widely credited as the backbone of South Korea's economy. Due to chaebol' instrumental role in transforming South Korea from a poor, war-torn country to an economic powerhouse, they have enjoyed unprecedented access to and support from the government. This has led to many issues regarding nepotism and corruption, most notably publicized through the 2016 South Korean political scandal.

Many critics have called for a complete reformation to improve their corporate practices and to curb chaebol' monopolistic tendencies that often squeeze small and medium enterprises (SMEs) off the market. Currently, in this rather predacious environment, SMEs that are potentially more innovative struggle to maintain competitive.

On the surface, the complete dismantlement of chaebol seems to be a viable solution. However, not only this is unlikely, but also will be extremely detrimental to the Korean economy as they constitute a major part of it. President Moon needs to enact significant corporate reforms to ensure sustainable growth and reduced inequality.

Firstly, his office needs to work on reducing government-chaebol connections that often leads to corruption. This can only be achieved through establishing a strong legal framework and an independent judiciary that aims to break the cycle of impunity. Recently, President Moon enacted a major reform to transfer some of the prosecution's jurisdiction to the police, ending years of prosecution's sole authority to indict. While the effect of this newly-implemented policy is yet unclear, his administration is hoping to avoid a situation where “absolute power corrupts absolutely.”

Another major problem is South Korea's export-dependent structure. Currently, exports accounts for a staggering 43 percent of the GDP. This indicates that on the back side of South Korea's seemingly prosperous economy is the reality that fluctuations in the global economy will be fatal to the Korean economy. China and the U.S accounts for 25 percent and 12 percent of Korean exports respectively.

This heavy reliance of two countries could be critical especially with the ongoing China-U.S trade dispute. If their trade friction turns into an all-out trade war, South Korea will be one of the hardest hit in the world. This is due to many Korean firms selling intermediate goods to China, which are connected to U.S firms based in China. Furthermore, political disputes such as China's retaliatory measures such as increased tariff over the installation of THAAD highlights Korea's dangerously-high economic dependence on China.

One solution is diversifying its trading partners to offset the impacts of such trading conflicts. President Moon has already made several visits to emerging economies such as India and Vietnam to alleviate many trading barriers Korean exporters face. Another method is boosting the domestic demand as South Korea's ratio of domestic demand to its GDP ranks very low compared to OECD nations.

Finance Minister Kim Dong-yeon has already called out the importance of an expansionary fiscal policy aimed at improving private investment and weak consumption. By injecting money into the economy, demand for goods and services will increase causing production to go up. This will make firms hire more people, reducing the high youth unemployment rate of 10%. However, a major setback is the country's demographics and economic realities; an increasing proportion of elders and low birth rate is leading to shrinking consumption. Furthermore, the inflation brought on by the fiscal policy causing economic burden will need to be carefully addressed.

Currently, South Korea is at a major turning point. Many variables such as the ongoing peace negotiations with North Korea can have a significant impact on the economy. Despite the problems mentioned above, there is no question that what South Korea has achieved within such a short time period is astonishing and commendable at every level. However, acknowledging these problems and addressing them effectively and transparently is key to sustained growth. Excessive economic dependence on China giving them power to rule the roast should gradually be reduced. Furthermore, South Korea needs to shift gears and help foster a more innovative services-oriented economy co-initiated by SMEs and chaebols on a level playing field. To bequeath a strong, sustainable economy for our future generations, economic reformation is not a choice but a must.