ed Consumer welfare

Parallel growth in trade, domestic demand needed

Korea has rewritten world economic history having marked $1 trillion in annual trade. It is the ninth country to do so. For the past five decades, the country has posted the world’s fastest growth rate in exports. Korea's trade has grown by six times as fast as the world economy. In three years, Korea will overtake such countries as the United Kingdom to become the world's fifth largest trading country.

But the stunning records are a glorious legacy of the past. They do not mask the current stark reality. Consumer welfare has not jumped in keeping with the explosion of external trade. The economy now has a dual structure, with exports booming but domestic demand busting. The gap between small and large firms has expanded. Small-and medium-sized enterprises account for 99 percent of the companies and 88 percent of the jobs.

The jobless rate remains high. Little trickle-down effect is visible. The service sector is about 58 percent of the manufacturing sector in productivity.

Textbooks say that consumer welfare will rise through trade. The domestic distribution system has layers of inefficiencies that fatten pockets of importers at the cost of consumers.

Many exporters, including manufacturers of cars and electric vehicles, sell products more expensively at home compared to overseas. This overcharging is to offset their razor-thin margins or losses abroad. Exports have had little trickle-down effect in the economy in recent years. Despite a 15-percent annual expansion in exports since 2000, personal income has become stagnant. No parallel growth has been made in domestic demand. Consumption and business investment grew by 4-5 percent annually over the past decade.

For the first time, exports became bigger than private consumption in gross domestic product (GDP). The local economy is overexposed to external shocks as the share of trade in GDP, called trade dependency, rose to 97 percent.

Exporters of manufactured products have lost the capacity to create extra jobs in keeping with the rise in overseas sales. Five items, including cars, shipbuilding, and electronics, account for 42 percent of total exports. Diversification of export items is necessary. A shift to qualitative growth from the past quantity-focused expansion is key to doubling trade.

Policymakers have little time to sit reminiscing over past glories. They need to devise strategies to boost domestic demand. Attracting foreign direct investment must receive added attention.

A jobless expansion in trade does not promote consumer welfare. The government needs to expand support for any export firms capable of creating jobs.

Creating a level playing field between the manufacturing and the service industries requires the government to shift the support system to the non-manufacturing sector. Service sector companies must be able to become exporters. Trade growth that does not maximize consumer welfare is of little meaning. Like two parallel tracks of a railroad, trade and domestic demand must be balanced.