The Korean economy contracted 1 percent in 2020 from the previous year, largely due to the fallout from the COVID-19 pandemic, according to the Bank of Korea (BOK). This represents its worst performance since the Asian financial crisis hit the country in 1998 when the country's gross domestic product (GDP) shrank 5.1 percent.
The contraction was mainly due to declines in private consumption and exports which dropped 5 percent and 2.5 percent, respectively. By comparison, government expenditure and facility investment rose 5 percent and 6.8 percent, respectively, in spending on stimulus measures.
The nation's gross national income (GNI) per capita also decreased for the second consecutive year, barely sustaining the $30,000 level. Despite the growth setback, South Korea fared relatively well compared to other developed countries which recorded economic contractions of between 3 percent and 10 percent last year. Quoting World Bank data, Bloomberg said that Korea posted the highest economic growth rate among OECD member countries.
The government has used relief funds to help underprivileged people and small business owners, and to pump up sagging consumption amid the pandemic. Crafting four extra budgets last year, the government poured 66 trillion won ($60 billion) into attempts to boost the economy and support individuals and battered businesses. This had the effect of boosting GDP by 1 percentage point, despite the drop of 2 percentage points in the private sector.
Deputy Prime Minister and Finance Minister Hong Nam-ki acknowledged this by saying, “The state budget greatly contributed to minimizing the economic slowdown. This proves again that our economy remains relatively stronger despite the crisis, compared to other developed countries.” Cheong Wa Dae also said the growth rate is higher than previously forecast by major domestic and foreign organizations, and market estimates.
Boding well for the national economy, the International Monetary Fund (IMF) said Tuesday that South Korea is expected to be able to register 3.1 percent growth for this year, revising up its October estimate of 2.9 percent. The global economy will also likely rebound in light of coronavirus vaccination programs in many countries coupled with a massive stimulus package adopted by the U.S. administration. The IMF also raised global growth from 5.2 percent to 5.5 percent this year.
These and other factors are positive signs for the Korean economy which relies on exports. Yet what matters most is how to revive domestic consumption, which remains sluggish. The government should take proper measures to revitalize consumer spending by, for example, providing more assistance to vulnerable people and expanding the social safety net. It also needs to take pump-priming steps, while monitoring the spread of COVID-19.
No less important is to create a more favorable business environment to attract more investments. Deregulation holds the key. President Moon Jae-in should roll up his sleeves and work to promote innovation and entrepreneurship. All policies should be focused on speeding up economic recovery and boosting growth potential to overcome the current difficulties.