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Before the deluge

June 23,2018
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Kim Dong-yeon, deputy prime minister for economy and finance minister, presides over an emergency meeting at the Central Government Complex in central Seoul on June 15. [YONHAP]
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Kim Kwang-ki
*The author, the head of the Economic Research Institute for the JoongAng Ilbo, is an editorial writer.

Luck was on President Moon Jae-in’s side. The economy picked up after he took office in May 2017. Exports surged on demand for chips, and tax revenue was greater than expected. A mini-real estate boom helped reinvigorate domestic demand. The economy was able to run at the potential rate of 3 percent and gave impetus to Moon’s progressive policies of wage-led growth, the phasing out of nuclear power and enhanced social welfare programs.

But luck has a way of running out. The data is pointing to a sinking economy. Moon’s liberal economic policies and their impacts are being challenged.

The external environment has turned volatile as well. The U.S. Federal Reserve implemented this year’s second hike in interest rates this month and warned of two more increases in coming months. The eurozone also has started tightening its ultra-loose monetary policy. Monetary tightening in developed economies causes problems in emerging markets. Worse, the world’s two largest economies are engaged in an escalating trade war. The export-dependant Korean economy is bound to suffer. In fact, exports, which grew by the double digits last year, are losing steam this year.

Mainstay export industries are losing their competitiveness. Trade conditions can improve, but Korea’s exports cannot be saved if its products are shunned.

Semiconductors are the only item managing to keep their edge against Chinese competition. Shipbuilding has been defeated and the automobile sector is struggling. Displays have been replaced by Chinese brands, and smartphones may be the next product to go into terminal decline.

The cash-rich Chinese government and its corporate sector are united in their goal to become powerhouses in semiconductors, electric vehicles and nuclear reactors. China aims to replace Korean brands in all factory-produced items by early 2020.

The government seems oblivious. The Trade Ministry is hardly noticeable these days. It is entirely engrossed in fulfilling the president’s campaign pledge of weaning the country off of nuclear power. Korea Inc. is at a transitional point. It must decide what to yield to China and what to defend. A new beginning will require concerted efforts from the government, corporate and union. But there is only cacophony.

The family-run chaebol are preoccupied with successions. Young heirs are deferring risky management decisions due to a lack of experience. Chaebol sitting on piles of cash use it to indulge foreign shareholders through generous dividends instead of investing in facilities.

The domestic economy is expected to recede in the second half. A chill in the real estate market is likely to spread due to tightened regulations in lending and a hike in property tax. If the minimum wage goes up by double digits next year following this year’s 16.4 percent rise, bankruptcies may be inevitable for small merchants. Jobs and incomes of the lower-income class will come under strain.

Vietnam has become a popular destination for Korean businessmen. Factories are being built there or moved there. Young people use their savings for overseas travels. Frontiers have become meaningless in corporate and individual spending. In such an open economy, income-led growth cannot work.

Jang Ha-sung, Moon’s chief of policy, defends the income-led growth policy by claiming there is no firm evidence that points to a negative impact on jobs. But he doesn’t need statistics to see what’s going on. All he has to do is get out of the Blue House and observe the idle street businesses and industrial sites.

Inter-Korean ventures could be one kind of breakthrough. But whether they will become possible depends on North Korea denuclearizing. Moreover, the benefits of that process may go to U.S. and Chinese companies rather than South Korea’s.

The Moon Jae-in administration wasted its golden time in its first year when economic conditions were better on experimental policies. It should have focused on innovative growth through deregulation. Growth in innovation comes from creative destruction that takes place in the corporate sector.

The government should radically remove regulations, balance policies with practicality and carry out a more market-friend policy through accurate understanding of domestic and external conditions.

JoongAng Ilbo, June 22, Page 28