Korean econ­omy ap­proach­ing ‘rock bot­tom’

HRI chief de­scribes in­come-led growth pol­icy as ‘com­plete fail­ure’

The Korea Times - - INTERVIEW - By Jhoo Dong-chan [email protected]­re­atimes.co.kr

We be­lieve Korea’s econ­omy started en­ter­ing the de­clin­ing phase in Septem­ber 2017. It’s now near­ing rock bot­tom.

Ma­jor eco­nomic data are in­di­cat­ing that the na­tion’s econ­omy is now in a deep down­turn. Deputy Prime Min­is­ter and Fi­nance Min­is­ter Hong Nam-ki ad­mit­ted dur­ing a re­cent me­dia con­fer­ence that the gov­ern­ment is likely to fail to meet its eco­nomic growth tar­get of 2.4 per­cent for 2019, say­ing growth would stand at be­tween 2 per­cent and 2.1 per­cent for this year.

Korea man­aged to add more than 300,000 jobs for two con­sec­u­tive months from Au­gust thanks to the gov­ern­ment’s mas­sive spend­ing to cre­ate jobs in the pub­lic sec­tor, but has still failed to cre­ate qual­ity jobs, es­pe­cially in man­u­fac­tur­ing, for years. Those in their 30s and 40s have con­tin­ued to lose their jobs for months.

Ma­jor think tanks and credit rat­ings agen­cies are now warn­ing of the pos­si­bil­i­ties of Korea slip­ping into long-term re­ces­sion with de­fla­tion­ary pres­sure emerg­ing as a ma­jor risk for the na­tion’s econ­omy.

Hyundai Re­search In­sti­tute (HRI) Pres­i­dent and CEO Lee Dong-geun agreed Korea’s econ­omy is in the dark­est hours at the mo­ment. He ex­pects it to bot­tom out next year.

“We be­lieve Korea’s econ­omy started en­ter­ing the de­clin­ing phase in Septem­ber 2017. It’s now near­ing rock bot­tom,” Lee said dur­ing an in­ter­view with The Korea Times.

“The cur­rent down­trend is in­evitable con­sid­er­ing ex­ports ac­count for about 70 per­cent of Korea’s econ­omy. It’s nat­u­rally vul­ner­a­ble to ex­ter­nal fac­tors. The Sino-Amer­ica trade row is last­ing longer than an­tic­i­pated. And an­other trade dis­pute be­tween Korea and Ja­pan has added the fuel to fire.”

De­spite its cur­rent down­turn, how­ever, Lee dis­agreed with a se­ries of main­stream me­dia claims that Korea is en­ter­ing a Ja­pan-like re­ces­sion driven by long-term de­fla­tion.

“The in­fla­tion rate plunged be­low the 0 per­cent mark in Au­gust. The trend is likely to con­tinue for a while. I un­der­stand mount­ing fears about a pos­si­ble long-term re­ces­sion as Ja­pan has been go­ing through. It is worth mon­i­tor­ing the sit­u­a­tion now, but Korea just isn’t there yet,”

Hyundai Re­search In­sti­tute (HRI) Pres­i­dent and CEO Lee Dong-geun he said.

The vet­eran econ­o­mist said that the Korean econ­omy will get back on the recovery track in 2020 cit­ing the lat­est out­look by the In­ter­na­tional Mon­e­tary Fund (IMF). The IMF fore­cast Korea’s econ­omy to grow 2.2 per­cent next year.

“I agree with the IMF’s out­look. Next year will be bet­ter than this year,” Lee said. “There are sev­eral fa­vor­able fac­tors. Korea holds a gen­eral elec­tion next April. The U.S. also holds a pres­i­den­tial elec­tion next year. These will boost the econ­omy to a cer­tain de­gree,” Lee said.

HRI also fore­cast in its study that the lo­cal econ­omy would grow 2.2 per­cent for 2020. De­spite the think tank’s some­what op­ti­mistic out­look for next year, Lee claimed the gov­ern­ment should fos­ter a more fa­vor­able busi­ness en­vi­ron­ment for firms.

“I wouldn’t give an A grade for the gov­ern­ment’s eco­nomic poli­cies,” Lee said.

“The low in­fla­tion rate trend isn’t the crux of the mat­ter in Korea’s econ­omy. Korea’s un­fa­vor­able busi­ness en­vi­ron­ment is rather a big­ger ob­sta­cle drag­ging down the econ­omy.”

He ad­vised the gov­ern­ment to change its anti-en­ter­prise sen­ti­ment im­me­di­ately.

“Firms are fac­ing tough chal­lenges from out­side. Korea’s eco­nomic struc­ture de­pends heav­ily on the man­u­fac­tur­ing sec­tor and its ex­ports. The na­tion’s man­u­fac­tur­ing sec­tor is con­fronting stiff chal­lenges from its Chi­nese coun­ter­parts amid wide-spread­ing pro­tec­tion­ism world­wide,” Lee said.

“Chal­lenges are also com­ing from in­side. Op­por­tu­nity costs in Korea are now higher than most coun­tries in the world, while do­mes­tic de­mand is worse than ever be­fore. Firms are down­siz­ing their in­vest­ment as well as hir­ing.”

He said the Moon Jae-in ad­min­is­tra­tion’s sig­na­ture “in­come-led growth pol­icy’ should be read­dressed.

“It’s a com­plete fail­ure,” he said. “Wage hike does not im­me­di­ately lead to con­sump­tion in an open econ­omy, es­pe­cially in an ex­port-cen­tered econ­omy like Korea. The gov­ern­ment’s pres­sure to im­ple­ment the 52-hour work­week is also im­pos­ing tremen­dous pres­sure on firms, es­pe­cially smal­land medium-sized ones. These won’t help the na­tion’s econ­omy at all.”

The Sino-Amer­ica trade dis­pute has seem­ingly - again — reached a break­through as Wash­ing­ton and Bei­jing an­nounced last month that they had reached a ten­ta­tive agree­ment for the “first phase” of a trade deal, with China agree­ing to buy up to $50 bil­lion in Amer­i­can farm prod­ucts, and to ac­cept more Amer­i­can fi­nan­cial ser­vices in its mar­ket, with the United States agree­ing to sus­pend new tar­iffs.

De­spite the cur­rent thaw­ing in trade be­tween two ma­jor economies,

Lee said Wash­ing­ton and Bei­jing are likely to con­tinue their com­pe­ti­tion for global hege­mony for some time.

“Their com­pe­ti­tion for eco­nomic hege­mony is likely to con­tinue even af­ter the U.S. pres­i­den­tial elec­tion,” he said.

“This is in­evitable. We are on the verge of en­ter­ing a bipo­lar world or­der from an eco­nomic view­point. The two will con­tin­u­ously vie for eco­nomic hege­mony.”

Un­like Wash­ing­ton and Bei­jing’s eco­nomic tug-of-war, the on­go­ing trade dis­pute be­tween Korea and Ja­pan is likely to be eased soon, Lee claimed.

“This was driven po­lit­i­cally. Nei­ther econ­omy suf­fered da­m­age due to the trade dis­pute. A num­ber of Ja­panese peo­ple are still vis­it­ing Korea while Korean cus­tomers are eas­ing their boy­cott of Ja­panese prod­ucts,” he said.

Korea Times photo by Choi Won-suk

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