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[Editorial] Declining growth

Reliance on fiscal spending to bolster the economy is unsustainable

Preliminary data released Wednesday by the Bank of Korea showed the country’s economy grew 2 percent in 2019 from a year earlier. The figure marks the slowest on-year growth since 2009, when Asia’s fourth-largest economy expanded 0.7 percent in the aftermath of the global financial crisis.

The central bank’s growth estimate for last year, which was on par with the government’s forecast, beat predictions by most private experts. The average of 2019 growth estimates by seven analysts recently polled by a local financial news outlet stood at 1.89 percent.

Economic policymakers in President Moon Jae-in’s administration appear to have heaved a sigh of relief as they managed to achieve the 2 percent growth target, which had been lowered from the original goal set at 2.6-2.7 percent.

In a meeting with corporate officials later Wednesday, Finance Minister Hong Nam-ki, who doubles as deputy prime minister for economic affairs, said it was meaningful that the economy held onto what he described as its “psychological Maginot Line.”

He expressed confidence that the country’s economy could rebound this year, citing a better-than-expected performance in the fourth quarter of last year. The economy expanded 1.2 percent on-quarter in the final three months of 2019, the fastest quarterly growth since the July-September period of 2017, when the economy grew 1.5 percent.

Earlier this week, President Moon said the economy appeared to have bottomed out, vowing that his government would make all-out efforts to maintain the recovery momentum.

The Ministry of Finance and Economy expects the gross domestic product to expand 2.4 percent this year.

What is needed now is not to put forward optimistic prospects but to redress misguided policy approaches that have held back economic growth.

The Moon administration has relied mainly on expanding fiscal spending to shore up the economy while dragging its feet on deregulation and implementing pro-labor measures that have increased the burden on companies.

Fiscal expenditure increased 6.5 percent on-year in 2019, following a 5.6 percent rise the year before.

To some extent, increasing fiscal spending is needed to bolster growth amid deteriorating conditions at home and abroad.

But the increase in fiscal spending since Moon took office in 2017 has been intended mainly to offset the negative impact of ill-conceived policies and expand cash transfer rather than enhance the efficiency and competitiveness of the economy.

Deteriorating indicators pointing to the sapping private sector show the government’s reliance on fiscal spending to bolster the economy is reaching its limits.

Private consumption grew 1.9 percent last year, the slowest pace since 2013. Facility investment and construction investment shrank 8.1 percent and 3.3 percent, respectively, in 2019.

Manufacturing output recorded a 1.4 percent on-year expansion last year, down from the 3.4 percent in the previous year.

Korea’s exports plunged 10.3 percent from a year earlier in 2019 amid the prolonged trade dispute between the US and China and a delayed recovery in the global semiconductor market.

The country saw its gross domestic income shrink 0.4 percent last year, the first contraction in more than two decades.

Government spending contributed 1.5 percentage point to the 2019 economic growth, with the contribution by the private sector remaining at 0.5 percentage point.

The better-than-expected performance in the fourth quarter was underpinned by a surge in fiscal expenditure, as the government stepped up efforts to minimize the amount of leftover budget. The rate of government expenditure’s contribution to the quarterly growth reached 1 percentage point, while the corresponding figure for the private sector remained at 0.2 percentage point.

Economic expansion dependent on fiscal expenditure is unsustainable and will lead to a steep rise in national debt.

The government should make a fundamental policy shift to help revitalize corporate activity and boost the long-term growth potential.

Accelerating regulatory, structural and labor reforms is all the more necessary as external conditions may aggravate further this year. According to a recent report from the International Monetary Fund, the US, China and Japan -- the world’s three largest economies -- are expected to see their growth rates slide from 2.3 percent, 6.1 percent and 1 percent in 2019 to 2 percent, 6 percent and 0.7 percent, respectively, in 2020.

Moon and his economic aides recently vowed to promote innovation-led growth by lifting regulations. But a Cabinet meeting presided over by Moon on Tuesday passed revised ordinances of the commercial code and capital market law, which would introduce more regulatory restrictions on private firms.

Without a drastic departure from the persistent anti-corporate stance, the country’s economic growth rate might tumble far below 2 percent, as predicted by many private institutions.
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