The global economic crisis will test whether South Korea can gain long-term competitiveness by changing its heavy reliance on exports and a limited number of big companies, veteran journalists from the country told a recent symposium in Tokyo.
The administration of President Lee Myung Bak has spelled out ambitious goals of creating new demand and jobs through his version of the “Green New Deal,” but questions remain over whether it can create new engines to drive the economy, they said.
Four journalists from South Korea’s major newspapers took part in the March 13 symposium organized by the Keizai Koho Center to discuss the country’s economic, social and political outlook as it tries to cope with the fallout from the global crisis. Motohiro Ikeda, an editorial writer for the Nikkei business daily, served as moderator of the event.
The global crisis has probably affected South Korea more seriously than any other Asian economy because of its vulnerability to external factors, said Park Young Gyun, an editorial writer for the Dong-A Ilbo.
Japan suffered a 12 percent fall in its gross domestic product in the last three months of 2008. But if calculated the Japanese way, South Korea’s GDP shrank by nearly 20 percent in the October-December period from the previous quarter, Park noted.
The government has forecast a 2 percent fall in GDP for 2009, but the real performance of the South Korean economy will likely be much worse, given the gloomy data, including a 34 percent decline in exports in January, he said.
South Korea has so far survived two major economic crises — first in 1979 and then amid the 1997 Asian financial crisis. However, Park said many of the structural problems in South Korea’s economy remained unresolved or had even worsened since the last crisis.
Its economy’s dependence on exports, which averaged 33 percent of GDP in the 1990s, increased to 54 percent in 2002 and to nearly 60 percent in 2003, he pointed out.
Major business groups account for a large portion of the country’s exports, and as much as 43 percent of exports are concentrated on five main sectors — semiconductors, automobiles, wireless communications equipment, computers and shipbuilding — compared with 33 percent in 1999, he said. South Korea has also not overcome its structural weakness of relying on imports for a large portion of the materials and components of the products it makes, he added.
Dark clouds hang over all of the major markets for South Korea’s exports — China, Japan, the United States and the European Union — said Kim Jung Ho, managing editor and online news editor of the Korea Economic Daily.
A recovery in the U.S. economy is unlikely this year while China — the biggest market for South Korean exports — buys components and materials for its U.S.-bound products from South Korea, Kim noted. Japan, for its part, suffers from a lack of strong political leadership and given that a general election must be held this year, its stimulus efforts are not expected to have an impact until next year at the earliest, he added.
Before the current crisis hit home, the Lee administration had promised 7 percent GDP growth in its first year in office. Following the Lehman Brothers shock of September, however, Lee’s first economic team has been replaced by a new team, which faces the daunting task of overcoming the impact of the global crisis, Park said.
According to Park, Lee’s economic agenda has a lot in common with that of the Japanese government — mobilizing fiscal stimulus through an extra budget, stabilizing the financial market and providing support for the socially weak.
The administration and the ruling Grand National Party are pushing for a big supplementary budget of more than 30 trillion won and South Korea’s fiscal conditions today are healthy enough to sustain major public spending packages, Park said.
However, there will be limits to how far fiscal stimulus could boost the economy, he said. The crisis has severely hit South Korea’s middle class and increased the ranks of the poor, and these factors — combined with the falling birthrate and the aging population — would inevitably erode domestic demand, he added.
Small businesses, which account for a major portion of the South Korean economy, have been hit hardest by the current crisis, and more than 100,000 small shops and restaurants have gone bankrupt each month, Park said.
The government has put priority on job security and is preparing policy measures, including tax incentives, to encourage companies to introduce work sharing, so that the pain of the economic crisis can be widely spread among the public without massive job cuts, Park noted.
However, such a practice has so far only been adopted at public corporations and major companies, he added.
The biggest problem, Park noted, is that the South Korean economy has lost much of its dynamism over the past decade.
Since the 1997 crisis, many firms have tended to shy away from fresh investments and focused instead on holding cash and reducing debts to improve their financial health, he said. Due to regulations on domestic investments, a lot of companies turned their eyes to countries like China and Vietnam, he added.
The Lee administration is now trying to create conditions that facilitate more domestic investments by pushing its version of the Green New Deal, with plans to invest 50 trillion won by 2012 in efforts to turn South Korea into a low-carbon economy led by environment-related demand, Park noted.
What’s at stake, he said, is whether South Korea can build industries that can compete internationally in the coming decade or two. The global crisis has placed the country at a crossroads — whether it can correct its overdependence on exports and big businesses, and build new industrial engines of growth, he added.
Kim of the Korea Economic Daily concurred that merely surviving the current crisis would not ensure a path of future growth for South Korea. The country, he said, would not be able to join the ranks of advanced economies without changing its economic and industrial structures.
South Korea still relies heavily on energy-intensive manufacturing sectors, and the country was classified as a “developing country” under the 1997 Kyoto Protocol on global warming and spared numerical targets for reducing its greenhouse gas emissions, he said. However, the country would simply lose competitiveness if it lags behind other economies in altering its industrial structure to deal with climate change, he added.
The point, Kim said, is to be on the offensive in dealing with climate change and try to make environmental issues a main source of the country’s future growth.
Since last summer, the Lee administration has announced a series of basic policies for seeking “green” growth and realizing a low-carbon economy, and a basic law for achieving such goals is set to be approved by parliament in April, Kim said.
Lee’s Green New Deal policy is aimed at overcoming the current crisis, creating jobs and at the same time building social infrastructure, Kim noted. The 50 trillion won initiative consists of nine major projects, including work to improve the water quality of the country’s four main rivers, which combined are estimated to create 960,000 jobs, and the government also plans to invest 6.3 trillion won in research and development for promoting new renewable energy, low-carbon energy, high-tech water processing systems and other fields, he said.
A strong feature of these initiatives is that they are backed by the government as the country’s key growth strategy, Kim said, adding that a panel has been established directly under the president’s authority to oversee those efforts.
But Kim noted that because the initiatives have been put together so quickly, public consensus and the participation of the corporate sectors are insufficient. Resistance lingers among the opposition camp and civic groups, and the new policies may not have taken root among the local government officials who will actually implement them, he said.
Also, it will be a challenge for South Korean manufacturers to become competitive globally in the field of environment technologies, even though they may have good ideas, Kim pointed out.