While the global economy grew 3.7 percent last year, South Korea’s growth marked a six-year low of 2.7 percent.
Government spending, however, surged 5.6 percent, the largest increase in 11 years. Growth contribution by government expenditures in the fourth quarter reached 1.2 percentage points, the highest since the first quarter of 2009, while the private sector’s contribution shrank to negative 0.3 percentage points in the quarter.
Last year’s growth was effectively propped up with taxes. However, growth cannot be sustained with taxes. Weakened fundamentals and competitiveness of the national economy are worrying.
A recent fall in the Korean economy is alarming. Exports, which have driven its growth, are on a fast slide. Exports from Jan. 1-20 this year plunged 14.6 percent year-on-year. Semiconductors, which amount for about 20 percent of the nation’s exports, nose-dived 28.8 percent during the period. Shipment volume to China, Korea’s largest export market, slumped 22.5 percent.
To make matters worse, China’s growth slowed on-year by 0.2 percentage points to 6.6 percent last year. It is said to be its lowest growth since 1990. Its growth is expected to go down to 6.3 percent this year. Korea’s growth is said to fall 0.5 percentage points when China’s growth drops 1 percentage point, according to research studies.
In this situation, the government must stay alert and prepare thoroughly to overcome difficulties at home and abroad. Nothing is more pressing than strengthening fundamentals of the national economy. It is crucial to implement measures to reinvigorate business activity and investment.
However, Korea’s corporate competitiveness appears to be falling. The labor cost burden has increased greatly due to steep minimum wage hikes and reduction of workweek. Corporate investment in facilities contracted 1.7 percent in 2018.
The job situation of the youth is serious. According to a survey of college and university students slated to graduate next month, 9 in 10 have not gotten regular full-time jobs yet.
No growth, no jobs. Welfare and security are hard to keep up without growth. The government has increased its spending to stimulate the economy, but increased fiscal expenditures did not work out. Rather more taxes had to be collected, sapping vigor form businesses and consumers. Now is not time to expand welfare disproportionately to growth.
The correct answer to these issues is already at hand. The problem is the government is not going in the direction it points.
Among other measures, corporate investment must be deregulated. The selfish vested interests of labor unions, particularly unions enjoying high wages but congealing low productivity, must be removed. Tax cuts need to be considered to stimulate consumption.
But these time-tested solutions are all water off a duck’s back, Deregulation efforts have been frustrated by an ideology emphasizing fair economy more than the opening of new possibilities.
The Moon administration has tightened oversight over large businesses. Labor unions have wielded almost undisputed power on the back of its pro-labor stance. Law enforcement officers shunned taking active steps to stop their illegal occupations and rallies.
The government is considering intervening in the management of private-sector companies via shareholder activism by the National Pension Service.
A profit-sharing system, which requires large companies to give part of their profits to small and midsized partners, is under consideration.
Government measures to boost exports are easygoing. Export financing and marketing support are the best steps figured out for now. It is urgent to find ways to raise export competitiveness of existing industries, while discovering new export industries.
For all the side effects of policies his government has taken, Moon vowed not to change the direction of economic policy. These days, Moon and his economic policymakers are trying to increase their communication with businesses in a bid to review their investment. However, without the change of their policy direction, such efforts may go up in smoke, and the growth of the Korean economy may slow further this year.