By Kim Jae-kyoung
South Korea will find it harder to pull itself out of a protracted economic slump because of the economy losing its vigor due to low productivity, soaring household debt, an inflexible labor market and weakening exports amid growing challenges from China.
These and other structural problems, if not addressed, will continue to tighten the job market for young people and undermine the potential for economic growth further, analysts said.
What’s most worrisome is that Korea is losing its competitive edge in the new world of the global economy led by G2 countries — the U.S. and China. China, which used to be a fast follower, is now emerging as the biggest competitor in the global IT market.
China has dropped a copycat strategy and reformed industries to become market leaders. China’s major firms, including Huawei, Tencent and Alibaba, are good examples showing how fast Chinese players adapt to industrial disruptions.
While China is trying hard to find future growth engines, Korea is struggling to resuscitate old industries such as shipbuilding and shipping, with little effort to foster future industries, such as bio, autonomous vehicles and robotics.
AliciaGarciaHerrero, chief economist of Natixis Asia-Pacific, said that Korea’s economy is vulnerable to the slower global demand in two main ways.
“The developed world is not recovering as fast but also, very importantly, China is moving up the ladder and thus reducing its imports of intermediate goods,” she said
“The latter is really a killer for Korean exports. China is becoming a competitor rather than an export market,” she added. “Other risks for Korea are increasingly low productivity due to aging and household debt.”
The global slowdown has dealt a blow to Asia’s fourth-largest economy sending key economic activities to their worst level since the 1997-1998 financial crises.
According to Statistics Korea, the operation rate of factories stood at 74.3 percent last year, the lowest level since 1998. It fell even further to 72.2 percent in the second quarter of this year.
The jobless rate for youth between the ages of 15 and 29 came to 9.3 percent last month, up 1.3 percentage points from a year ago. That was the highest August figure since 1999.
Mauro Guillen, economics professor at the Wharton School of the University of Pennsylvania in Philadelphia, stressed that Korea needs to focus on two issues — factory utilization and consumer confidence.
“If factory utilization drops a lot, then it is certainly a problem. Companies will suffer. It is important to avoid very low rates, but without dumping products,” he said.
“The Korean economy is driven by exports, but domestic consumption has become more important over the last 15 years.”
A high level of private debt also remains one of the biggest downside risks to growth. A rise in borrowing costs is expected to have far-reaching impact on the economy by driving many overleveraged borrowers into bankruptcy.
“Although interest rates remain low now, any rise in debt servicing costs could result in bankruptcies that would hamper production and growth,” Moody’s Analytics analyst Emily Dabbs said.
In order to find an economic breakthrough, the government should take more proactive macro policies while reforming labor markets and fostering new champions in new, promising industries.
“The government announced a further stimulus package aimed at supporting job growth and providing infrastructure spending,” Dabbs said.
“This should support growth in the near term, but Korea’s rigid labor market and the ongoing issue of private debt remain two key areas that need to be addressed.”
Sohn Sung-won, economics professor at California State University, said that monetary and fiscal policies are the key in the short run.
“Fortunately, Korea has room to stimulate growth by increasing budget deficits. Monetary policy has not been very proactive in supporting the economy,” he said.
In the longer term, experts said that Korea should develop new growth engines to compete with China. In particular, Korea should urgently reduce its reliance on old manufacturing industries and focus more on knowledge-based services.
“Many of Korea’s key export industries are facing stiff competition from China. China will become a less important market for Korean products in the future,” Sohn said.
“The backbone of Korea’s past strength — shipbuilding, automobiles, IT, chemicals etc — is losing steam,” he added. “Korea needs to focus more on service industries, including education, healthcare and finance.”