The Korea Herald


[Editorial] Dwindling momentum

Japan’s growth outstrips Korea’s; OECD lowers outlook for Korea fifth straight time

By Korea Herald

Published : June 13, 2023 - 05:30

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Japan's economy expanded 0.7 percent in the January-March quarter from the previous quarter. On an annualized basis the country expanded 2.7 percent, significantly higher than economists forecasted. Its growth was more than twice as high as South Korea’s 0.3 percent. If this trend continues all year around, Japan's growth is likely to outstrip South Korea’s for the first time in 25 years after the foreign exchange crisis of 1998.

The Organization for Economic Cooperation and Development recently lowered its 2023 growth outlook for South Korea to 1.5 percent from 1.6 percent. On the contrary, it raised its growth outlook for the global economy to 2.7 percent from 2.6 percent. South Korea is going backwards despite signs of global economic recovery. Also notable is that the OECD has lowered its growth projection for South Korea for the fifth straight time.

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho said in a debate with journalists last week that the government needs to revise down a little its forecast of 1.6 percent growth for this year.

South Korea's slowdown in growth stems from exports decline. Exports, which prop up South Korea’s economy, decreased 15.2 percent year over year and fell for eight straight months in May. Semiconductor exports plummeted 36 percent. Semiconductor export growth dwindled 10 straight months from August last year. The country had a trade deficit 15 months in a row.

But the problem is that South Korea has few cards to play to supplement its declining export. The government lacks fiscal resources to stimulate the economy due to the previous administration's splurging of funds on populist schemes and projects. To make matters worse, the fiscal authorities collected 33.9 trillion won ($20.6 billion) less in national tax than anticipated for the January-April period.

After all, it has no other way but to induce companies into investing more and exporting more. The government needs to increase tax benefits and financial support for technology development particularly in strategic industries such as semiconductors, secondary batteries and automobiles.

It is urgent to revive semiconductor exports, among others. The product once accounted for 20 percent of the nation's total exports, though its proportion shrank recently due to a drop in exports.

The government must also accelerate regulatory reform to spur innovation in the industries of the future, such as biotechnology, nuclear power, defense, artificial intelligence and robotics.

Structural reforms are the best way to improve competitiveness and productivity. But reforms are making little progress. For example, the Yoon Suk Yeol administration's plan to revise working hours, an important part of labor reform, is at the risk of running aground due to opposition from the majority opposition party and labor circles. The government’s lack of effort to make people understand the plan properly added to the problem. A labor group decided to exit a trilateral dialogue with the government and the management.

The same is true of regulatory reform efforts to induce corporate investment. The government strives for regulatory reforms, but the results are yet insignificant. Vested interests block the way for innovation as seen in the case of Tada, a van and driver rental app. The National Assembly revised related law to effectively ban the new service apparently to curry favor with taxi drivers who oppose Tada. Later the Supreme Court ruled the service not illegal, but related law is not revised again yet.

To add insult to injury, South Korea's birth rate is extremely low. It has the world’s lowest fertility rate, but an innovative solution to raise the rate is nowhere in sight. The country is also on the verge of becoming a super-aged society.

If reforms fall through, South Korea will likely face a gloomy prospect of its potential growth falling to the lowest in the OECD due to a sharp shrinkage of its labor force.