The South Korean economy has shown positive signs recently, but prospects may not be so bright due to the increasing costs of handling an aging society, five South Korean think tank researchers met at a recent symposium in Tokyo to discuss issues facing South Korea.
The five discussed issues affecting the South Korean economy in general, including governmental measures to address the nation’s aging society, elderly poverty and South Korean manufacturers returning production back to their home country.
The researchers were guest speakers at the “South Korean economy, industries and companies’ moves under the global economy,” symposium, which was organized by the Keizai Koho Center in Tokyo on April 18.
Prospects for Korean economy
The first speaker, Kim Seong-tae, a researcher at the Korea Development Institute (KDI), delivered a presentation, titled “Korean Economic Outlook and Policy Issues.”
He began his presentation with an overview of major global economic powers — the U.S., EU, Japan and China.
The U.S. and EU economies’ indicators are looking good with unemployment and retail and industrial sales showing improvement, he said. Regarding Japan, Kim said he is closely watching the effects of April’s consumption tax hike from 5 percent to 8 percent. He expects the Japanese economy will slow in the second quarter and is curious as to whether it will rebound in the third quarter.
Kim expects China to meet this year’s growth target of 7.5 percent, but is cautious over China’s long-term prospects as there are some structural problems such as an imbalance between urban and rural areas.
Addressing the South Korean economy, Kim showed statistics indicating that the growth rate had declined since 2010 but has recovered since 2013. Also, gross fixed capital formation has been increasing since the beginning of 2014, but private consumption expenditures have been basically flat since the second quarter of 2010, suggesting domestic demand has stalled.
His estimate of the South Korean growth rate is 3.7 percent this year, up from 2.8 percent last year.
“The risk for the South Korean economy is a lack of dynamism, as companies that should go bankrupt are allowed to survive,” he said.
South Korea is ranked low in foreign direct investment because of strict industrial regulations and a lack of labor liquidity, he said.
Rising household debt and declining housing prices are also risk factors, he said.
How to fund welfare costs?
Yoo Jin-sung of the Korea Economic Research Institute discussed the government’s plan to fund welfare in his presentation “Korea’s Welfare and Fiscal Policies and the Implications for Sustainable Social Welfare.”
Demand for welfare has been surging in South Korea amid one of the world’s lowest birth rates. The country is aging even more rapidly than Japan.
Younger generations also need welfare as the poverty rate for those aged between 15 and 64 have risen, he said.
Consequently, government welfare expenditures have been rising in the long term. Yoo presented a graph indicating welfare is the only category out of four — welfare, economy, education and defense — that is on the uptrend of fiscal expenditure from 1970 to 2010. Defense spending is on a clear downtrend, the economy is on somewhat of a downtrend and education is roughly flat.
He also spoke of President Park Geun-hye’s welfare policies, such as additional subsidies for day care services for all children up to five years old and medical expense assistance for cancer, heart disease and other common life-threatening diseases.
Generally, many past presidential candidates have raised the issue of welfare needs, but Park is currently reviewing her welfare policies because of difficulty in securing funds for them.
“Park’s administration is really trying hard to secure welfare funds,” Yoo said. The administration’s immediate choices are to review welfare policies, change priority of various policies or raise taxes, he said.
“Of course, the most desirable scenario is for economic growth to increase the absolute amount of tax revenue,” he said.
Kim Dongsoo of the Korea Institute for Industrial Economics and Trade was the third speaker, giving a presentation “Industrial Policy to Low Growth and Aging Society in Korea.”
He began his presentation with a look at South Korean history, saying the country became politically stable in the wake of aftermath of the Korean War in the 1960s, participated in the Organization for Economic Co-operation and Development, or OECD, in 1996 as its economy had grown steadily, went through the Asian currency crisis of 1997 and has since economically come back and enjoyed continuing prosperity.
But in recent years, as the population has aged rapidly, the working age population has dropped and productivity has sagged, he said.
He also noted that the South Korean economy is highly dependent on China and that there may be an overreliance on that relationship.
Kim praised his government for focusing on particular industries to make the economy stronger. The government also boosted the economy by sealing free trade agreements with many partners, including the EU and the U.S.
Elderly in poverty
Ryu Sang-yun, an economist at the LG Economic Research Institute, delivered a presentation titled “A Return to Poverty — Income and Consumption of Korea’s Elderly.”
“Poverty among the elderly is a very serious issue. It’s not only a social problem but an economic problem,” Ryu said.
He showed graphs showing sources of income for elderly in Japan and South Korea. The significant difference between the two countries is the elderly in South Korea rely on support from their children much more than those in Japan do.
In South Korea, support from children accounted for 54.8 percent of the elderly’s income in 1990, while the figure fell to 30.1 percent in 2010, according to Ryu. In Japan, the percentage was 5.7 percent in 1990 and almost nonexistent in 2010.
In South Korea in 2010, children’s support was the second largest source of income after salary, which was 37.5 percent. The third sources came from the public pension at 10.6 percent.
“Even as the ratio of support from children dropped significantly, it still makes up a higher percentage than pension. It is very serious for the elderly that their sons and daughters are now more reluctant to help them than before,” Ryu said.
South Korean elderly are not as wealthy as their Japanese counterparts because they spend money mainly on food and not much on culture. This is in sharp contrast to Japanese, Ryu explained, using graphs to clarify his point.
Manufacturers making U-turns
Jung Hosung of the Samsung Economic Research Institute delivered a presentation titled “Korean & Japanese Manufacturing U-turns.”
Companies in developed countries are shifting production capacity back to their home countries because having factories in developing countries is not as advantageous as it once was.
Japanese companies had been increasing foreign investment until about 18 months ago as a strong yen made the strategy cheaper. But with Abenomics in place, the yen weakened and the domestic economy has become stronger, triggering Japanese manufacturers to return production to Japan.
In South Korea, 51 companies, including manufacturers of jewelry, shoes and other labor-intensive businesses, are planning to return production to South Korea, Jung said.
As labor costs have sharply increased along with transportation costs due to rising oil prices, there is not as much cost advantage in having factories in developing countries as before.
Additionally, invisible costs of having factories in developing countries have emerged. These include problems with low quality and worries about technology and intellectual property leaks.
U.S. manufacturers are making similar moves, but they tend to use Electronic Manufacturing Services companies, instead of building their own factories, making a shift in production easier, he said.
South Korea in December enacted a law reducing corporate tax for companies that opt to repatriate production, making it more attractive for companies to do so.
Hidehiko Mukoyama, a senior economist at The Japan Research Institute Ltd., moderated the subsequent question and answer session.
Responding to Mukoyama’s question regarding South Korea’s current account surplus and strong won versus the yen, Kim of the Korea Development Institute said, “The surplus now is not necessarily good because part of the reason is that domestic investment and consumption are poor.”
“This means companies are holding on to profits rather than spending on investments or wages,” he said.
Regarding the strong won, he said it’s partly because the South Korean economy is more stable than that of Southeast Asia, where financial markets are shaky due to the end of quantitative easing in the U.S.
Speaking about the strong won versus the yen, the KDI’s Kim is not concerned about a trade deficit against Japan because South Korean companies hedge currency risks by having factories in many locations around the world, he said.
Mukoyama also asked how South Koreans view the recent trend of extending retirement age at South Korean companies.
Jung said South Korea has studied Japanese baby boomers and the retirement issue. He did not have a clear answer, but stopped short of saying it is “an important issue between managements and labor unions.”
Yoo added that the country needs sources of funds for welfare expenditure, hinting that using veteran workers is necessary for the economy.
Ryu expressed his opinion on the issue, citing research showing that extending the retirement age is unlikely to hinder young people in getting jobs.
“Those currently in middle age won’t be able to work much longer under the current retirement age. To look at the issue from many perspectives, it is inevitable to extend retirement age.”
“We need separate policies to tackle the issue of unemployment of young people,” Ryu said.