 |
Analysts suggest policy prioritizing innovation, productivity
By Park Hyong-ki
President Moon Jae-in's key economic policies supporting fast minimum wage hikes and income redistribution without spurring productivity and innovation in the private sector have hurt the economy and its future potential, analysts say.
The side effects caused by the so-called income growth policy do not pose a downside risk as much as the ongoing trade war between the U.S. and China.
But analysts say the severe impact from the wage hikes and structural reform delays has "exacerbated" the uncertainties over the Korean economy.
And it has led to a "significant lowering" of the country's growth potential in the medium to long term, they said.
 |
| Christian de Guzman, Moody's Investors Service vice president |
"In an environment of slowing growth, those measures have gained limited traction. Conversely, they could have gained more traction under more supportive growth conditions."
He added the country's exposure to the U.S.-China trade row and the tightening of global liquidity pose the most "prominent near-term risk" to the economy, leading it to project Korea to grow 2.5 percent in 2018 and 2.3 percent in 2019. This is lower than the Bank of Korea's forecast of 2.7 percent in 2018 and 2019.
Its fundamentals remain strong as its economy is well diversified with a high level of competitiveness when compared with its peers.
However, the administration's policy won't work in times of a slowdown, but has only weakened the job market.
"In other words, the current environment of slowing economic growth in Korea ― precipitated in part by the deteriorating outlook for global growth ― does not provide a sufficient buffer for the labor market to adjust to the government's measures without weakening unemployment," De Guzman said.
Alicia Garcia Herrero, chief economist of Natixis Asia, called Moon's income growth policy "detrimental and outdated," saying it cannot help boost either income or growth amid the slowdown.
She suggested the administration's second economic team, which will soon be headed by the incoming Finance Minister Hong Nam-ki, to change its strategy by putting priority on spurring innovation and labor productivity backed by reforms.
 |
| Alicia Garcia Herrero, Natixis Asia chief economist |
"The reason its income policy is so detrimental for Korea is proven by the reduction in employment creation by small- and medium-sized enterprises as one would expect."
Herrero said she considered the policy had more adverse effects on the economy than the challenges from the U.S.-China tit-for-tat tariffs.
"The trade war might, ironically, help Korea as it makes Chinese products less competitive in the U.S. market. In that regard, I do think the income policy is more detrimental for Korea than the trade war," she said.
One of the adverse effects from the income growth policy Korea saw was an increasing number of companies leaving the country to establish production plants in Southeast Asian countries such as Vietnam.
"Samsung is one of the first movers, but smaller companies pushed by Moon's policy are following," she said.
 |
| Rajiv Biswas, IHS Markit Asia chief economist |
The economy is following the path of Japan's "two decades of weak growth" since 1990, he added.
"Korea's manufacturing sector is likely to face continued hollowing out, as its large manufacturing shifts production of products such as cars, electrical and electronics goods to low-cost hubs elsewhere in fast growing emerging Asian markets," he said.
"While the impact of the U.S.-China trade conflict creates a downside risk to Korean growth in the short term, the impact from the labor market will significantly lower Korea's growth potential over the next 20 years."
![[INTERVIEW] North Korean defectors bear brunt of remittance scams](https://img.koreatimes.co.kr/upload/thumbnailV2/75c261156ac7415fad92dc1d7c1b30cf.jpg/dims/resize/178/optimize)
![[INTERVIEW] Foreign-born entertainers seek to revolutionize local industry](https://img.koreatimes.co.kr/upload/thumbnailV2/4a6b2bd3d23044d699dee3c5bb956863.jpg/dims/resize/178/optimize)
