Korea’s 2 percent growth this year, regarded as a psychological Maginot Line of its economy, looms as a long shot.
According to the Bank of Korea, Korea’s real gross domestic product grew only 0.4 percent in the third quarter from the previous quarter.
The central bank estimates the Korean economy must grow at least 0.97 percent on-quarter in the October-December period to reach the 2 percent target. But given tough economic situations at home and abroad, it is hard to expect a strong boost in the fourth quarter. Exports, a major propeller of Korea’s economic growth, are on a 10-month skid from December last year. External conditions have not been improved prominently yet.
Korea’s growth has fallen below 2 percent just four times since growth data began being compiled in 1954 -- in 1956 (0.7 percent), 1980 (minus 1.7 percent), 1998 (minus 5.5 percent) and 2009 (0.8 percent). In 1956, Korea had a bad harvest. In 1979 there was a global oil crisis. In 1997, the country received a bailout from the International Monetary Fund to overcome a currency crisis. And in 2008, the global financial crisis broke out.
Even though the world economy is slowing down and low growth is understood as a common phenomenon for developed countries, Korea’s stunted growth this year is particularly concerning in view of the absence of severe external shocks of the kind that Korea experienced four times.
The Korean economy contracted 0.4 percent in the first quarter, rebounded with 1.0 percent growth in the second, but lost steam in the third. Second-quarter growth was driven largely by government spending. However, the fiscal effect cannot but decrease after the government frontloads its budget spending, because public finance is limited. The government spent 78 percent of its 2019 budget by end-September.
The government contributed 78 percent to the third-quarter growth, with the private sector accounting for the rest. The government share is abnormally large. On the contrary, in the first quarter of 2017 before the current administration took office, the government contributed 13 percent against 87 percent by the private sector. That looks normal.
External economic prospects are not bright. China’s economic growth could fall below 5.8 percent in 2020, slower than 6.1 percent forecast for this year. The US economy is expected to slow from 2.2 percent this year to 1.7 percent in 2020.
Of course, external factors have some influence on Korea. But last year when the global economy was booming, the country struggled with shrinking employment and slowing business. This indicates that policy failures as well as external difficulties account for its economic troubles. Experts have warned on numerous occasions that Korea’s growth could fall into the 1 percent range. But the government and ruling party paid little attention and focused on expanding fiscal spending.
These days, growth does not necessarily increase employment, partly due to automation and global sourcing. Nevertheless, jobs cannot be created and sustained without growth. Of course, the government needs to expand its spending when private-sector consumption and investments are slow. But fiscal expansion has limitations and side effects. What matters more is to spend taxes effectively. They must be used to raise growth potential, such as infrastructure costs and research and development programs.
The best way to spur growth lies in the private sector. Companies must be encouraged to invest more and employ more. The first job for the government should be to remove hurdles to their business activities.
President Moon Jae-in’s administration must turn around quickly from an untested course of “income-led growth.” It should be business-friendly, push labor reforms and deregulation, and roll back anti-market steps that have driven businesses out of the country.
The key to boosting growth is to activate corporate investment through labor reforms and deregulation.