While Japan’s economy may finally be bidding farewell to the “lost decade” of the stagnant 1990s, growth in South Korea, once noted for its rapid recovery after the 1997 Asian crisis, is slowing down amid serious problems like mounting household debts.
That was the majority assessment of the six journalists from South Korea who took part in a March 19 symposium organized by Keizai Koho Center.
Businessmen, bureaucrats and politicians they met during their weeklong stay here were much more confident of Japan’s economic revival than before, the journalists told the audience.
Kim Dong Won, editorial writer for the Maeil Business Newspaper, compared the headlines of two feature articles that appeared in the Economist magazine in September and February as an example of how the world’s view toward Japan’s economy has changed.
“The Sept. 27 issue featured a story headlined ‘Kill or Cure?’ — reflecting the frustration of the United States and Europe over Japan’s economic performance. Then the Feb. 14 issue carried an article with the headline ‘Japan Flying Again,’ featuring a picture of a crane spreading its wings,” Kim said.
“This change is amazing given that the articles were published only five months apart,” he said. “So is Japan really spreading its wings? My impression is that Japan is finally saying goodbye to the ‘lost decade.’ “
Contrary to the largely negative view in Japan toward Prime Minister Junichiro Koizumi’s structural reform initiatives, some of the panelists gave relatively high marks to the progress of reform here.
Song Yang Min, editorial writer of the Chosun Ilbo daily, said Japan is heading in a good direction, for example, in dealing with the rapid aging of its population — a problem that is estimated to hit South Korea someday with the same degree of seriousness it is confronting Japan today. Japan has laid down a program for public pension reform, and the question of raising the mandatory retirement age is being discussed publicly — matters on which South Korea has yet to begin resolving, he said.
At the same time, Song urged Japan to put greater emphasis on policies to improve the quality of life of its people, an area in which it still lags behind Western industrialized nations.
Other panelists offered a more cautious assessment.
Kim Byung Su, economy and business editor with the Hankyoreh newspaper, said the current state of Japan’s economy reminds him of South Korea’s quick recovery from the 1997 crisis.
Right after the 1997 crisis, South Korea was lauded for speedily implementing structural reforms, but such efforts slowed down as complacency set in after the economic upturn, he said.
“Now South Korea is paying the price,” Kim said, adding that he hopes Japan will learn from the experience of its neighbor.
After the crisis, Kim said, South Korea achieved a fast-paced recovery with its government injecting public funds to boost domestic demand.
The economy recovered but there was a bubble, and now the country is exposed to the bubble hangover, though it may not be as serious as the one that hit Japan in the 1990s, he added.
Japan’s economy is now apparently in a recovery phase, but the budget deficit will continue to be a huge burden, Kim pointed out. He also raised doubts on whether Japan has fully overcome its own bubble hangover, citing the still high levels of nonperforming loans at Japanese banks which, he said, may be acceptable during an economic upturn but would be troublesome if the economy turns sour again.
Then what are the prospects for the South Korean economy?
In 2003, gross domestic product expanded by 3.1 percent from the previous year — much lower than the 7 percent growth in 2002 and the slowest growth rate since 1998.
A slumps in consumer spending and corporate investment is cited as the main factor.
Lee Se Jung, an editorial writer for the JoongAng Ilbo newspaper, explained how the current contraction in private consumption is a backlash against the government policy launched just a few years ago to promote consumer demand through increased use of credit cards.
Under the loose money policy during the 2001-2002 period, the use of credit cards and individual bank loans rapidly expanded, which led to the consumer spending boom and helped South Korea achieve rapid growth, Lee said.
But the number of “credit delinquents” — people in appears in credit card payments — rose sharply last year, and banks were saddled with nonperforming loans to the point where they can no longer extend loans to risky individual clients, he said.
This prompted the government to tighten regulations on credit card use, which in turn led to the slump in consumer spending.
Another objective of the government’s policy of encouraging credit card use was to fight tax evasion.
According to Song of the Chosun Ilbo, the government took steps following the 1997 crisis to move money out of the underground economy into legitimate transactions that can be subject to tax and contribute to revenue increases.
It provided tax incentives and gifts to consumers and shops using credit cards, and in the intense competition to lure customers, banks and conglomerate-affiliated firms issued credit cards to people without the ability to pay, such as university students, Song said.
“They believed that the economy will grow rapidly if they keep issuing credit cards. . . . Coupled with the indiscriminate use of credit cards by the South Korean people, it was a policy failure of the government,” Song said.
At one point, as much as 15 percent of the South Korean GDP relied on spending by consumers who use credit cards, according to Kim Dong Won of the Maeil Business Newspaper.
Jeong Kyu Jae, deputy managing editor for the Korea Economic Daily, said the South Korean economy is now in a complicated structure in which extremely successful players and extremely troublesome elements coexist.
For example, Samsung Electronics Co. has a global competitive edge in a wide variety of fields, such as semiconductors, digital audiovisual equipment and cellular phones, he said.
Perhaps only a few Japanese companies like Toyota Motor Corp. are currently in a position to make profits of the same level as reported by Samsung, he added.
At the same time, South Korea has nearly 4 million credit delinquents, accounting for roughly 10 percent of the country’s working population, and this problem is contributing to the current political tension, Jeong pointed out.
According to Lee of the JoongAng Ilbo, forecasts show the South Korean economy will pick up steam this year and will achieve 4 percent to 5 percent growth, particularly because growth in 2003 was sluggish.
The two major problems of the economy today — the household debts and slump in corporate investment — may gradually be overcome with time, he said.
But one reason economic experts and the media in South Korea cannot be optimistic is that the basic outlook isn’t so bright for the nation’s economic fundamentals, Lee noted.
“A number of people are uncertain what will be the main sources of income — on what our growth will rely on — in the future,” he said.
South Korea’s growth has so far been led by such sectors as automobiles, shipbuilding and steel — in a way following in the footsteps of Japan’s postwar industrial development, Lee said.
But will the country be able to continue relying on these heavy industries? The widespread view in South Korea, Lee and other panelists agreed, is that the past structure of growth has reached its limit.
South Korea found at least one alternative engine as it struggled to overcome the 1997 crisis. Both the government and private sectors spent heavily on information technology as a new source of growth, and South Korea is now considered a world leader in terms of IT infrastructure.
In this regard, Japan, which was well ahead of South Korea in postwar industrialization, is playing a game of catchup with its “e-Japan” program of trying to make itself the world’s leading IT power by 2005.
But Ko Song Cheer, deputy chief editor of the Dong-A Ilbo, said it is questionable whether the Japanese government can take bold leadership in concentrating the nation’s resources on IT investments.
The foundations of South Korea’s IT boom was built in the early 1980s when leaders of then military regime used their strong power over budgetary distributions to pour money into the infrastructure, Ko said. That investment blossomed 20 years later into today’s IT boom, he said.
With its leading technologies in the field of electronics, Japan has the potential to become an advanced IT power if private-sector investments accelerate, Ko said. But it is doubtful whether the government sector can build IT infrastructure with the same speed of South Korea, he added.