S.Korea’s faltering economy serves as global warning

By Ma Weiying Source:Global Times Published: 2019/11/18 19:43:40

Illustration: Xia Qing/GT

In a World Economic Outlook report released in October, the IMF slashed South Korea's economic growth outlook for this year to 2 percent from the previous 2.4 percent. OECD also cut the country's expected GDP growth in 2019 to 2.1 percent. Investment banks all followed suit, lowering their outlooks for the South Korean economy.

Mirroring such external pessimistic perspectives, the central bank of South Korea has lowered its economic prospects three times in a row. Additionally, the country's consumer price index has seen zero percent growth in October. A depreciated won, sagging export sector and drop in foreign direct investment all point to an economic winter for South Korea.  

There are several external explanations for South Korea's gloomy economic performance. First, the global economic slowdown has weighed on the country's economy. Since 2018, major global economies have been growing at a slower pace. The IMF has lowered its growth expectations for the global economy to 3 percent from 3.3 percent. A slower world economy has imposed great negative impact on the export-oriented South Korean economy.

Second, US trade protectionism has been taking a toll. In May, the US government initiated section 232 investigation into automobiles and automotive parts, which have affected South Korean exports. The US is South Korea's largest market for automobiles - 33 percent of South Korean automobiles are exported to the US. Due to the restrictions, auto exports are shrinking. The US has also placed limitations on more of the nation's exports, including tariffs on washing machines, solar panels and steel. These have dented not only exports, but also jobs.

Third, the China-US trade war has had an indirect influence on the South Korean economy. The IMF believes that, other than China and the US, South Korea will shoulder the greatest damages due to the close connection between it and its largest trading partner, China. Fewer exports will make their way to China when the trade war reduces the quantity of Chinese products being sent to the US. 

The trade frictions between South Korea and Japan have also had an impact. Japan restricted exports of three semiconductor materials to South Korea in July and removed South Korea from its fast-track trade "white list." Though the South Korean government claims it is actively looking for countermeasures and that its economy has not been influenced, this will affect its mainstay industry, worsen its domestic investment environment and strike down investor confidence in the long term. 

The country's industrial structure and economic policy have aggravated its economic depression.

South Korean magnates control the nation's main industries. Government policy support and financial assistance to the magnates have created market failure and squeezed the space for small and medium-sized enterprises (SMEs). The country's economy has become reliant on magnates. Business conglomerates known as chaebol are deeply intertwined with the nation's politics.

South Korean President Moon Jae-in's government has adopted a series of policies to improve citizens' incomes, such as increasing the minimum wage and implementing a 52-hour working system. These measures are aimed at improving social welfare and the standard of living. However, government intervention in the economy has increased labor costs for SMEs, cut job opportunities and resulted in operating difficulties for companies. Moon Jae-in was pursuing a fair government and better employment statistics, but now the high unemployment rate and the growing gap between rich and poor have become the most prominent social problems in South Korea, and the root of the people's contention against the incumbent party. 

In order to save its economy from slipping further, the South Korean government has devised three measures. First, it is creating supplementary budgets to aid young people find employment and support development in impoverished areas. 

Second, its central bank has cut its interest rate twice this year, to the current 1.25 percent.

Third, the country has been seeking innovations and exploring the Fourth Industrial Revolution which has several bases including data, artificial intelligence and smart factories.

However, these three measures can only exert a limited push on the economy. Adding budgets will elevate national debt and transfer the burden to the next generation. Continual cutting of the interest rate may shake up South Korea's financial market, triggering high household debt and housing prices, and eventually generating additional hardship for the people. The Fourth Industrial Revolution can hardly bear fruit in the short term.

Therefore, economic growth indexes will continue to plunge, reaching a territory below 2 percent. South Korea may once again face a predicament like the currency crisis of 1998 or the global financial crisis of 2008. 

The South Korean economy serves as an early warning for the global economy. The country's economic slowdown reflects the overall global situation. It is inseparable from its external environment, national industrial structure and current policy faults. These should be carefully examined.

The author is an assistant research fellow with the Center of Northeast Asian Studies at the Jilin Academy of Social Sciences. bizopinion@globaltimes.com.cn

Posted in: INSIDER'S EYE

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