Tackling challenges facing Korea

Finance Minister Yoo Il-ho

From ‘cape of storms' to ‘cape of good hope'

By Yoo Il-ho

In the 15th century Portuguese navigators had to pass the Cape of Storms, the southern tip of Africa in order to discover a trade route to India. As its name suggests, raging storms and fierce waves discouraged many journeys toward uncharted territory.

This anecdote reminds us of the tough situation facing the global economy. Since the global financial crisis, countries have had a rough passage through their own "cape of storms." Against strong currents of low growth and demographic changes, they are committed to finding new routes to solid and sustainable growth by fostering new growth engines and successfully surfing the wave of the Fourth Industrial Revolution.

For the past three and half years of Park Geun-hye administration, we have sailed smoothly amid heavy storms of secular stagnation in the global economy. Despite depressed trade volume, the Middle East Respiratory Syndrome (MERS) outbreak and North Korean nuclear tests, Korea recorded the third highest growth rate among the 12 countries with populations over 20 million and a gross national income (GNI) per capita over $20,000. And Korea climbed up three places in global gross domestic product (GDP) ranking from 14th to 11th. In particular, Korea's sovereign credit rating was taken to the highest level by three major credit rating agencies.

However, current economic challenges do not allow us to be complacent with these achievements. In fact, our economic success story is the best example of the saying "A smooth sea never makes a skilled sailor." We have ventured through a rough sea to have a competitive and open economy, turning the impossible to possible. This is what we have done and will continue to do.

There are three major challenges ahead of us. First, in the short term we are facing the headwind of low growth. The economic environment has changed dramatically since the onset of the global financial crisis. Countries are still struggling to recover to the pre-crisis growth level with the Organization for Economic Cooperation and Development (OECD) forecasting that the global economy this year will only grow by 2.9 percent, the lowest since the crisis. Moreover, as manufacturing makes a comeback in advanced economies and emerging economies produce more parts and components at home, trade elasticity to growth has slipped. Because of these changes in the global value chain, heavy reliance on exports, which was once Korea's strength, is now weighing down on its economic growth.

Second, in the mid-to-long term, we need to repair the Korean economic ship of state because it is plagued with structural problems. With the working age population expected to decrease from next year, there are worries that the overall economy may lose its vitality. And as we are not leading innovation toward the Fourth Industrial Revolution, the competitiveness of our major industries is deteriorating. Just like other countries that are intent on finding new growth engines, we should step up efforts to improve our industrial structure in terms of competitiveness and flexibility to adapt to the rapidly changing environment.

Third, external risk factors are all around, such as the possibility of a "hard Brexit," an expected U.S. interest rate hike, rising protectionism and worrying debt levels in emerging economies. All of these are adding to the uncertainty in the global economy. Moreover, there are growing concerns over internal risk factors such as rising household debt and restructuring in industries facing the global oversupply. Unless we brace for these risks, our economy will hit the rocks and not have smooth sailing.

Against this current of changes, the Korean government needs to play the role of an experienced sailor. The government will take the initiative in encouraging businesses and households to successfully meet these challenges and push ahead with structural reforms in a timely manner.

First of all, we need to right the economic ship. The fiscal stimulus package including a supplementary budget of 11 trillion won and an additional 10 trillion won spending package in the fourth quarter can serve as momentum to put our economy back on track. Moreover we will revitalize the private sector by encouraging environment-friendly investment and consumption and diversifying export items and markets. At the same time, we will carry out measures to minimize short-term side effects of corporate restructuring on employment and the economy of regions expected to be hit hard by restructuring.

In addition, we will improve our economic fundamentals. Building on achievements that have been made so far, we will complete structural reforms in the public, labor, financial and education sectors. While implementing industrial and structural reforms, we will spare no effort in fostering new industries as our growth engines. Along with these, we will be proactive in dealing with the aging population issue by encouraging businesses to hire more women, easing the burdens associated with marriage, childbirth and childcare, and ensuring a family-friendly business environment.

Lastly, we will strengthen monitoring of the rapidly changing internal and external environment. To navigate safely through rapid currents, constant monitoring of the global economy and coordinated efforts among the authorities are essential. We will also keep an eye on the housing market progress and rising household debt and find solutions if they take a turn for the worse.

Let's go back to the story of the Cape of Storms. Many explorers were frustrated by this. After arduous efforts, however, the sea route to India was explored and it was renamed as the Cape of Good Hope. We have no choice but to seek Hope from beyond the rough patch. Significant challenges lie ahead of us, but we are confident that today is a time of opportunity and hope that we must pass through to leap forward into leading advanced economies.

Yoo Il-ho is Deputy Prime Minister and Minister of Strategy and Finance