Making the Korean economy more resilient

By Song Kyung-jin

Last week the International Monetary Fund (IMF) slightly increased its global growth forecast for 2023 from the previous 2.7 percent last October to 2.9 percent, on the back of slowing inflation and China's earlier-than-expected re-opening. The Korean economy seems a misfit to this global growth scenario, being the only major economy whose growth forecast was adjusted downward from 2.0 percent to 1.7 percent during the same period.

Last December Korea's ministry of economy and finance presented President Yoon Suk Yeol its growth forecast of 1.6 percent for 2023 explained by the worsening external environment and dampening consumer demand owing to high-interest rates and household debt. The Korean economy contracted 0.4 percent in the fourth quarter of last year. In January, semiconductor exports posted $6 billion, a huge drop of 44.5 percent year on year.

So beware the Korean economy losing steam on its path to recovery. After each crisis, the world has witnessed winners and losers with widened wealth and health gaps within countries and between countries. The impact of the pandemic-induced crisis, coupled with global supply chain disruptions and the war in Ukraine, will not be looking much different.

We should, however, not lose sight of the past achievements and resilience of the Korean economy to crises. Out of each crisis it emerged stronger and more resilient, including the 1997/8 Asian financial crisis and the 2008 global financial crisis. Measures to alleviate the negative impact of the post-pandemic crisis will have to be carefully calculated and implemented.

A mindboggling issue for many from top to bottom is a cost-of-living crisis stemming from high inflation and the agility needed in response to reduce its adverse impact. Energy bills have caught many off guard. Targeted policy measures are needed to cushion the shock to ensure that vulnerable groups do not disproportionately bear the brunt of high energy and food prices. If not handled prudently, it is highly likely the situation could become explosive in the Korean context where confrontational party politics and the public's lost confidence in politicians and officials are prevalent.

Additionally, adequate supply-side policies such as deregulation and lower taxes need to be implemented for competitive industries under strain, like semiconductors. Investment in education and training is another critical supply-side policy to strengthen the nation's competitiveness. Many countries are in fierce competition for attracting the best talent available by either recruiting from around the world or making huge investments in domestic human resources development.

In this light, the meeting for talent development strategy convened by the president last week is an initiative to foster talent for five advanced technologies ― aerospace and mobility; biohealth; advanced parts and materials such as semiconductors and batteries; digital; and environment and energy. These are all critically important areas in tandem with the president's repeated emphasis on science and technology as a key pillar of national competitiveness. It is a policy initiative in the right direction because technological excellence leads to sustainable economic growth. The president should convene and preside over the meeting on a regular basis, desirably monthly, in order to keep the momentum intact and to avoid another fizzled-out attempt at the end of the day.

Now what is needed is action-oriented plans and measures to make progress and boost competitiveness. Central to it are bold investments in research and development (R&D) to fortify the development of the five advanced technologies. The administration stresses task-oriented R&D, private-led R&D, and the commercialization of R&D outcomes. This approach will bear fruit only when the government is determined to make the least possible intervention throughout the R&D process of the private sector including its firm support for international registration of intellectual property rights, especially for small and medium companies. When the private sector spends 7.5 trillion won in R&D, the government-proposed public-private R&D project will only be taken as seriously as its investment of 200 billion won. Instead of investing in this too small a project, the same money could be utilized for lowering taxes for R&D activities of private entities.

According to the IMF, China and India will be the major engines of global growth this year. Korea should also ride on the two giants' economic growth, not on geo-economic fragmentation. China's share in Korea's total export fell to 19.8 percent last month, the lowest since December 2008 at the height of the global financial crisis. Korea's continuing trade deficit with China has been worsening since May last year, hence leading to Korea's largest monthly trade deficit of $12.69 billion in January. Heavy dependence on a particular country or two always raises the risk of over-dependence and the difficulty of hedging risks. Diversification, therefore, has its own benefits, but it does not mean a total decoupling which is neither possible nor beneficial. China and India are still very important to the growth of the Korean economy.

Dr. Song Kyung-jin (kj_song@hotmail.com) led the Institute for Global Economics (IGE), based in Seoul and served as special adviser to the chairman of the Presidential Committee for the Seoul G20 Summit in the Office of the president. Now, she is the executive director of the Innovative Economy Forum.