When the Bank of Korea announced last week the country’s economy contracted an estimated 0.3 percent on-quarter in the first three months of this year, a presidential aide was quick to attribute the poor performance mostly to unfavorable external conditions.
But BOK Gov. Lee Ju-yeol struck a different tone, citing a sharp fall in corporate investment as a main factor behind the poorest growth record since the fourth quarter of 2008, when the global financial crisis was still underway.
In a meeting with heads of local banks Friday, Lee said a recovery of growth could be anticipated when corporate investment revived. He called for stepped-up efforts to boost corporate investment, which, as he noted, was the engine of economic growth.
The latest BOK data showed that facility investment in the country plunged 10.8 percent on-quarter in the January-March period, the steepest decline in more than two decades.
What should be noted is that, in contrast to their sluggish investment at home, Korean companies have continued to increase overseas direct investment in recent years.
According to figures released last week by the Export-Import Bank of Korea, investment made by local firms abroad reached a record high of $47.8 billion last year, up 9.1 percent from the previous year.
Such investment trends clearly indicate that anti-business policies implemented by President Moon Jae-in’s administration over the past two years have pushed companies to cut domestic investment and move production abroad.
Steep minimum wage hikes and other labor-friendly measures have put heavier burdens on them, while stalled regulatory reforms have hampered their efforts to find opportunities in new industries.
In a reflection of sluggish corporate activity, the number of workers employed in the manufacturing sector decreased by more than 100,000 for the fourth consecutive month in March.
The Moon administration has still shown no signs of changing its misguided policies, heightening worries that the slump in the Korean economy will deepen in the coming years.
The BOK last week revised down its growth outlook for this year to 2.5 percent from its previous forecast of 2.6 percent, while government policymakers still hope the country’s economy will expand 2.6 percent to 2.7 percent in 2019.
But private analysts have painted a gloomier picture of Asia’s fourth-largest economy, with some research institutes predicting its growth rate would fall below 2 percent this year.
Unfavorable economic conditions may be partly responsible for the decrease in Korea’s gross domestic product in the first quarter, as its exports fell 2.6 percent amid a global slowdown.
Still, it should be noted that US and Chinese economies -- the two largest markets for Korean manufacturing exporters -- performed better than expected during the same period, growing 0.5 percent and 1.4 percent, respectively.
The Moon government now needs to send a signal it will fix its ill-conceived policies and accelerate regulatory and labor reforms to make companies willing and able to invest.
Sweeping deregulation is needed particularly to nurture new industries, which could serve to bolster the economy held back by the weakening competitiveness of traditional manufacturing sectors.
The government may well be tempted to continue to expand fiscal spending to spur growth. Last week, it unveiled a supplementary budget bill of 6.7 trillion won ($5.78 billion), which it hoped would boost this year’s growth by an additional 0.1 percentage point.
Increasing fiscal expenditure at the cost of incurring government debt, however, cannot be expected to strengthen the foundation of long-term growth.
Focusing on forging more corporate-friendly conditions would be the surest way to revive economic vitality without spending taxpayer money. More corporate investment would result in creating more jobs and boosting consumption, which would in turn increase tax revenue and enhance fiscal soundness.
In this regard, consideration should be given to reducing corporate taxes.
Last year, the government raised the maximum corporate tax rate from 22 percent to 25 percent. As a result, tax payments by local firms jumped 18.8 percent in 2018, with their pretax profits increasing a mere 3 percent.
This runs against recent moves by other major economies to lessen tax burdens on enterprises, with corporate tax rates in the US and Japan having fallen from 35 percent and 30 percent to 21 percent and 23.2 percent, respectively.
The Moon government has made futile efforts to highlight what it sees as positive economic indicators, which critics say are no more than a reflection of increased fiscal expenditure. This attempt at glossing over worsening economic conditions will only make it harder to take the urgent steps needed to prevent the economy from being trapped in a low-growth rut for decades to come.