The Korea Herald


[Editorial] Recovery momentum

Efforts needed to make Korean economy more resilient in preparation for post-pandemic era

By Korea Herald

Published : Dec. 9, 2020 - 05:31

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A resurgence in novel coronavirus cases is slowing down South Korea’s economic recovery, though its manufacturing sector has been propped up by improving exports. Outbound shipments from Asia’s fourth-largest economy grew 4 percent on-year in November, bouncing back from a 3.6 percent decrease in October.

The country’s economy grew at a faster-than-expected pace of 2.1 percent in the July-September quarter from three months earlier, raising hopes that it was on a path to recovery. The figure marks the fastest expansion in 11 years and the first positive growth in three quarters.

But private consumption and facility investment recorded on-month declines again in October and industrial output stayed flat, showing that the recovery momentum remained weak amid the prolonged pandemic crisis.

A recent flare-up in COVID-19 infections, which has prompted the government to tighten its social distancing rules again, is expected to further dampen the fragile momentum.

The Korea Economic Research Institute, a private think tank, last week forecast that the country’s gross domestic product would shrink 1.4 percent this year and increase 2.7 percent next year.

The figures were lower than the estimates made by the Bank of Korea in November. The central bank predicted the Korean economy would contract 1.1 percent and expand 3 percent in 2020 and 2021, respectively.

The Organization for Economic Cooperation and Development last week forecast the Korean economy would retreat 1.1 percent this year before growing 2.8 percent next year, down from its September projections of a 1 percent contraction and 3.1 percent growth for the respective years.

Despite the downward revision, the OECD noted that Korea’s economy was expected to record the smallest decline among its member states this year, citing the country’s “effective measures to contain the spread of COVID-19.”

President Moon Jae-in and his economic aides may feel buoyed by the Paris-based organization’s prediction that Korea will fare better than other advanced economies in 2020 amid pandemic-caused difficulties.

But Korea’s relatively good performance is attributable largely to two factors unrelated to robust economic fundamentals.

One is the lower prominence of the service sector in the economy and the other is a higher reliance on China for exports.

With service businesses hit hardest by the spread of COVID-19 around the world, Korea has managed to better contain the economic shock of the pandemic due to the service sector’s reduced presence. From another viewpoint, however, this can be seen as evidence of a delay in restructuring its economy to forge new growth engines. A bill aimed at promoting the development of the service industry has been shelved at the parliament for nearly a decade.

Korea has benefited considerably from a rapid upturn in China’s economy since the second quarter as the country depends on China for a quarter of its outbound shipments. But an escalating confrontation between the US and China could heighten the risks of Korean exporters’ excessive reliance on the Chinese market.

The two factors that have helped reduce Korea’s economic contraction this year are likely to make its economy less resilient than other major economies down the road as the pandemic could possibly be under control next year with the distribution of vaccines.

The OECD’s 2021 growth outlook for Korea is far lower than its global growth estimate of 4.2 percent. A low-base effect is expected to push up the growth rates of the US and the EU to 3.2 percent and 3.6 percent next year while the Chinese and Indian economies are forecast to expand 8 percent and 7.9 percent, respectively.

A steep increase in fiscal expenditures to help cushion the impact of the pandemic crisis has covered up the negative effects of ill-conceived policies carried out by the Moon administration since it took office in 2017. A range of regulatory restrictions and pro-labor measures such as a sharp rise in the minimum wage and the rigid implementation of a shortened workweek were already hampering corporate activity before the outbreak of COVID-19 here early this year.

In the course of overcoming the pandemic crisis down the road, problems underlying the Korean economy will come to the fore again.

During a Cabinet meeting last week, Moon said Korea’s economy is rebounding strongly from the impact of COVID-19 and could return to the pre-pandemic level in the first half of next year if the trend continues. What the Moon administration needs to do now is to redress its misplaced policies rather than suggesting an optimistic outlook based on a diagnosis detached from reality.