Time to discuss averting 'Lost Decade'
Korea’s economic debaters are stuck in armchair daydreaming. Presidential candidates raise their decibel level on so-called democratization of the economy ― euphemism for taming the chaebol. They underestimate the seriousness of the looming global economic trouble, which will surely affect the Korean economy.
Signs are emerging that a lasting slowdown in the global economy has begun ― the current troubles are unlikely to end anytime soon. U.S. President Barack Obama has cited the “Lost Decade” as a prospect the American economy faces. The EU is more troublesome than the U.S., though pessimists predict that both will enter a Japanese-style deflationary phase.
Many Koreans are reluctant to believe that Korea could also enter a Lost Decade, more because of problems in the global economy than because of mismanagement by the government.
Ominous parallels between the economies of Korea and Japan can be drawn. Japan’s Great Recession began two decades ago following the nosedive of asset values, including property and stocks. Korea’s real estate market is so anemic and shaky that warnings loom of a bubble that may burst soon.
Housing prices are 30 percent below their peak. Golf membership prices are now half of their peak, pushing courses to the brink of bankruptcy. Even at these discounted prices, few are willing to buy. However, property prices are still high by global standards.
As Japan is aging fast, so too is Korea. Tokyo’s manufacturing stagnancy is mostly attributable to a lack of young workers. Korea also sees the early signs of a manufacturing downturn. Its share in the economy is falling at a noticeable pace. Korea must import workers as young Koreans are reluctant to do the so-called dirty, dangerous and difficult jobs. A massive retirement of the Baby Boom Generation ― about 7.2 million persons born between 1953-1963 ― will further sap manufacturing vitality.
Past data show that what happens in the Japanese economy, takes place in Korea two decades later. The time-lag of two decades lends credence to the prospect for an additional fall in Korea’s property prices.
Koreans have parked nearly 80 percent of their wealth in real estate. At this stage, the U.S.- style housing market trouble is unlikely here as banks set a ceiling on money homeowners can borrow in accordance with income and housing value.
A bursting of the bubble, however, will trigger a chain reaction ― the massive bankruptcy of homeowners, a further depression of consumption, a downturn in stock prices, investment reduction and additional economic contraction. The current economic woes are structural, not cyclical, as the potential growth rate, the optimal growth rate not entailing inflationary pressure, has fallen year by year. Korea’s economy no longer outperforms the global economy.
The dilemma is a lack of viable tools for engineering a soft landing of the property market. The central bank has trimmed rates to ease the burden of homeowners. Scrapping the current debt ceiling will be poisonous although it may curb additional falls in housing prices. A viable solution is to create more jobs so that homeowners can manage to pay interest due on their loans.
Making matters worse is the simultaneous trouble in the world’s three key economies ― the United States, the EU and now China. Their difficulty is a blow to the export-dependent Korean economy. Korea has limits in stimulating domestic demand: Government debt rose noticeably after the currency crisis in 1997, and the U.S.-originated financial troubles in 2008.
It is no coincidence that the currency crisis took place in 1997, the twilight period of the Kim Young-sam administration. President Lee Myung-bak, now reeling from corruption scandals involving his families and cronies, may lose his grip on the economy. The economy might remain in limbo until a new leader takes the oath next February.
Just months before the 1997 currency crisis, Korea was drifting over introducing labor laws. Now, the nation wastes time on an empty debate on how to teach conglomerates under the slogan of democratizing the economy. It is politically sexy but economically unattractive.
Presidential candidates are right in seeking to curb a few chaebol’s lopsided dominance in the economy. Chaebol have become more of a liability than an asset in easing the widening economic polarization.
Tycoons behave like emperors and changes in ownership conjure up the image of North Korea’s dynastic succession. They adopt so many tricky methods for wealth transfer. They know how to save tax in ownership succession and sometimes appear to be above law. Their predatory practices irk small firms and back-alley shop owners.
A bipartisan approach is necessary to solve the emerging economic malaises, including preemptive steps to prevent additional falls in housing prices. Election-year politicizing will worsen, rather than improve, the economy.
No quick-fix magic solution is available in this complex and inter-dependent economy.
Policymakers should take remedial steps now to prevent the collapse of the property market, and the economy from entering a long-term irreversible downturn. Without such preemptive resolute measures, Korea must brace for a Japanese-style deflationary, low-growth economic trap. The sooner they act, the better.
Lee Chang-sup is the executive managing director of The Korea Times. Contact him at email@example.com.