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Warning bells are ringing (KOR)

Aug 12,2019
Korea’s struggling economy’s outlook is even dimmer. Hyundai Research Institute (HRI) became the latest member of a chorus of Korean and international institutions warning of weakening in the long-term growth potential of the Korean economy.

HRI predicted Korea’s growth potential, currently estimated at 2.5 percent, would slump to around 2 percent from 2022-2025 and slip under 2 percent from 2026.

The growth potential is the economy’s maximum sustainable output without inflationary factors. In theory, it should grow with increased labor and capital. But with the lowest birth rate and fastest aging rate in the world, Korea’s input capacity in labor and capital has significantly weakened.

A maximum growth potential of less than 2 percent would mean the economy would enter stagnation. Japan, that once threatened the U.S. economy, has slipped into slow-motion economy and fell behind China in growth as a result.

Korea will lag further behind Japan if its growth is mired in the 1-percent range. The International Monetary Fund (IMF) projected that the per capita gap between Korea and Japan ,that narrowed to 79.7 percent last year, would widen from next year. Korea must not allow its growth potential to fall below 2 percent in order to sustain its competitiveness against Japan on the global stage.

To bolster growth potential, capital and labor increases must be stimulated to hone productivity. Anti-corporate and unfriendly market measures must go. The experiment with income-led growth through steep increases in the minimum wage and universal cutbacks in working hours has wreaked havoc in the economy.

Companies have lost vitality and self-employed businesses have been wrecked, resulting in high unemployment and worsening income inequalities. Korean companies must deal with shorter working hours even as they struggle in the face of trade barriers from Japan and elsewhere.

The government is planning a super-sized budget of 510 trillion won ($421 billion) next year. But that mostly goes on makeshift actions instead of structural reforms. Fiscal spending must aim at increasing female and senior participation in economic activities and promoting the investment environment and corporate investment. Reckless fiscal expansion will only increase debt for the future generation and further weaken the economy.