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Experts say current phase of low growth is not just cynical, it’s a slowdown resulting from structural factors
For several years now, South Korea has been haunted by the specter of a crisis. From time to time, mostly groundless rumors of crisis appear, such as the current hype about the “April crisis.” Why does speculation about an economic crisis continue when South Korea’s credit rating is the highest it has ever been and when the government is holding an ample amount of foreign-exchange reserves? And what should be done to avert the crisis?
An “absolute crisis” for the South Korean economy
On Mar. 2, the Korean Economic Association held a policy seminar titled “Absolute Crisis for the South Korean Economy: Where Should We Go?” As the seminar title implies, one of the most prestigious economic associations in the country concluded that the current situation is an “absolute crisis.”
“The phrase ‘absolute crisis’ might sound like an exaggeration,” said Gu Jeong-mo, president of the Association and a professor at Kangwon National University. “But both domestically and internationally, a perfect storm is brewing. We organized this seminar with the desperate sense that economists need to make their voices heard as the country gears up for the presidential election.” Leading South Korean scholars from various fields presented papers during the seminar.
Shin Gwan-ho, a professor at Korea University and an expert in macroeconomics and finance, expounded his theory of crisis using the keyword “low growth.” After noting that the South Korean economy had experienced two periods in which growth slowed considerably, in 1989 and 1997, Shin said that “since 2010, after the global financial crisis, the South Korean economy has fully entered a period of low growth, with a growth rate below 3%.”
“The low growth we’re seeing today goes beyond an economic cycle: it’s a slowdown resulting from structural factors,” Shin said. He even mentioned the phrase “hysteresis,” which refers to the economy deviating from its current growth course and being unable to return.
Lee Geun, a professor at Seoul National University and an expert on industry, used the expressions “mismatch” and “system failure” several times. “The current crisis is system failure, our failure to use bold, long-term investment to produce new companies, industries and jobs without government help. A mismatch is appearing not only in the area of R&D and the labor market but also in the need for long-term investment and Anglo-American shareholder capitalism,” Lee said.
Lee Hyeon-hun, a professor at Kangwon National University, identified the aging population, the Fourth Industrial Revolution, income polarization, intensifying social conflict and anti-globalization as being components of a “mega trend.” “The current situation itself, in which the waves of change are surging around the world, is bringing an absolute crisis to South Korea, which has to support itself on trade because it doesn’t have adequate resources,” Lee argued. “If the 1997 Asian financial crisis was a stroke, the current crisis is more akin to diabetes, the silent killer,” he added.
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The Korean Economic Association policy seminar titled “Absolute Crisis for the South Korean Economy: Where Should We Go?”, held at the Korea Federation of Banks in central Seoul, Mar. 2. (by Kim Tae-hyeong, staff photographer)
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What are the options?
Shin Gwang-ho’s proposals for escaping low growth were increasing taxes on added value, reforming chaebol and adopting an expansionary fiscal policy. Increasing the growth rate requires regulatory reform, and in order to reduce the resulting harm to vulnerable members of the society, it is necessary to raise taxes to bolster the social safety net, he said.
“After raising taxes to bolster the social security net, we must immediately pursue regulatory reform,” Shin said.
For his chaebol reform plan, Shin started with the diagnosis that the chaebol both serve as the agents of innovation and simultaneously block innovation to reduce competition. “We should strengthen investor protection to reduce the damage to small stockholders, and we need institutional improvements to promote competition and create the conditions for fair competition,” he said.
“If the government aggressively expands its spending when hysteresis appears in the economy, the GDP will instead increase, which can lower government debt,” Shin said. He also argued that resolving economic inequality was necessary for continuing growth and that, for this end, a more effective expansion of welfare was even more critical than tax policy.
Lee Geun said that public research institutes were currently only developing laboratory-scale technology. “Public research institutes need to provide small companies that lack the ability to carry out their own R&D with immediately applicable technology,” he said.
To encourage bold long-term corporate investment, founders of start-ups should be given incentives such as dual-class stock structure. “The reason that Google and Facebook can make bold investments is because a dual-class stock structure allows the founders to hold more than 50% of decision-making rights. In the same context, there needs to be a major expansion of the stock-option system,” which Lee explained would enable founders to reap the rewards when their companies succeeded.
Lee added that such policies were also necessary to resolve the polarization of the labor market and the difficulty for young people to find jobs. If talented employees at chaebol are able to quit their jobs and start new companies, while using stock options and dual-class stock structures to enjoy huge profits, young people would have less reason to avoid looking for jobs at smaller companies.
Lee Hyeon-hun called for a reorganization of the government. “We’ve already missed the boat on demographic issues such as the aging population. We must hurry to turn the Ministry of Gender Equality and Family into the Ministry of Population so that we can focus our efforts on demographic issues, and we should also dismantle the Ministry of Trade, Industry and Energy and set up an International Trade Commission reporting directly to the president in order to respond to anti-globalization,” he proposed.
By Kim Kyung-rok, staff reporter
Please direct questions or comments to [english@hani.co.kr]
