The South Korean economy is facing slow growth on the back of an aging population and other factors. Some South Korean companies are recalling overseas production, which they once sought in China and other Asian countries with lower wages, while high student loans are lowering the quality of life for Korean youth.
Six South Korean think tank researchers examined various aspects of the country’s economy in a symposium “South Korean Economy, Industry and Companies under Global Economy,” organized by the Keizai Koho Center in Tokyo on April 17.
Japanization
The first speaker, Jeong Dae-hee of the Korea Development Institute, began his presentation “Will Korea be Next Japan? A Macroeconomic Perspective,” by explaining the current status of South Korean economy.
The economy shrank in 2009 during the global recession, rebounding in 2010, but has been hovering around 2 to 4 percent since then, which is “slow growth,” Jeong said.
The consumer price index has been hovering at a low level, below 1 percent, and it fell to 0.5 percent in February. Statistics on production and consumption also show slow growth.
He then showed graphs of population growth, the elderly dependence ratio and the nominal GDP growth of both Japan and South Korea, with the former’s showing numbers from 20 years ago.
The graphs of the two countries are strikingly similar, indicating South Korea’s aging of population and nominal GDP have been trending in a very similar manner to Japan’s of two decades ago.
“I was surprised to see how similar the graphs are,” Jeong said.
In terms of housing prices, however, the two countries show sharp contrasts. Nominally, house prices in South Korea have been constantly rising since around 1998, while Japanese prices have been steadily declining since around 1991, indicating the Japanese peak during the bubble economy was extremely high.
What this means is that South Korea is facing Japanization and it must handle it appropriately.
To tackle the aging society, he recommends South Korea revamp its mandatory retirement system, raise women’s labor participation and develop the education system to boost creativity.
The government should upgrade support programs for small and medium-sized enterprises to decrease resource misallocation. Fiscal authorities should ensure fiscal prudence by addressing risks related to large welfare outlays, he said.
Low growth era
The second speaker, Jeon Young-jae of the Samsung Economic Research Institute, delivered a presentation titled “Korean Economy in the Low-Growth Era.”
“The impact of the global recession in 2009 seemed small for South Korea at the time, but the recovery afterward was smaller and slower than expected,” Jeon said.
He showed an OECD forecast of economic growth by country. From 2011 to 2060, the world as a whole is estimated to see 2.9 percent growth while Korea expects 1.6 percent. From 2030 to 2060, Korea’s estimated growth is 1.0 percent, compared with the world’s 2.3 percent, the United States’ 2.0 percent and Japan’s 1.4 percent.
“This shows South Korea has structural problems,” he said. The biggest one being the aging of its population, which will lower productivity, he added.
Another problem is an overreliance on particular industries, such as manufacturing and information technology, while others, including the service industry, are weak, he added.
The Bank of Korea and Jeon’s research institute estimate the growth rate, which was 3.8 percent in 2012, will steadily fall, reaching 3.3 percent in 2020, 2.4 percent in 2030 and 2.1 percent in 2040. Ideally, growth rate should stay at 3 percent, he said.
To deal with such structural problems, South Korea should enhance human resource training and upgrade its industrial structure to take advantage of its strength in the IT industry. For example, collaborations between IT and another industries will help counter imbalances and strengthen non-IT industries.
Additionally, the government should encourage innovation in companies and allow for more economic freedom through deregulation, he said.
Global value chain
The third presenter, Choi Nam-suk of the Korea Economic Research Institute, delivered a presentation, titled “The Effect of Korean Multinational Enterprises’ Global Value Chain Expansion on the Invigoration of Knowledge-Based Manufacturing Industries.”
In his presentation, Choi used empirical evidence to show South Korean multinationals’ global expansion has a positive correlation of invigorating knowledge-based industries such as information and communication technology equipment, fine chemicals and the environment.
In explaining the current status of South Korean multinationals’ expansion, he said it is increasing in Asia and value-added products made in foreign countries are increasingly used more to produce final exports in South Korean manufacturing.
He then explained studies using data from 2000 to 2009. He showed graphs indicating the correlation among global outsourcing, multinationals’ productivity and average industry productivity of South Korean knowledge-based industries.
The studies also showed a 1 percent increase of multinationals’ employment increases employment at small and medium-sized enterprises by about 2 percent. Similarly, a 1 percent increase of multinationals’ value-added creation increases average industry value-added creation by 0.812 percent.
In conclusion, global value chain expansion of South Korean multinationals in the knowledge-based industries positively affects the invigoration of small and medium-sized enterprises’ business activities.
Reshoring trends
Moon Jong-chol of the Korea Institute for Industrial Economics and Trade made a presentation, titled “Reshoring Trends of Korean firms: Motives, Issues and Policy Implications,” in which he explained the tendencies of some South Korean companies bringing production, which they once did overseas, back to South Korea.
South Korean companies, along with companies in the U.S., Japan and other developed countries, have been shifting their factories from their home countries to China and Southeast Asia. The motivation was that wages were lower in the areas and growing wealth and population in those areas would provide more business opportunities than home.
As for South Korean companies, mostly those in the electronics, automobile, chemical and basic metals sectors shifted production overseas, spending about $100 million to $500 million a year in overseas investment.
According to Moon’s survey of South Korean companies, their motivation to consider reshoring are 1) increasing wages in the overseas countries they are in, 2) expiration of incentives and benefits from overseas’ governments and 3) the positive effect of the “Made in South Korea” label.
However, some of them hesitate on reshoring because 1) domestic wages are still higher than those in developing countries, 2) they may face labor disputes with South Korean workers, 3) their customers may prefer them to keep production overseas, among other reasons.
The South Korean government is trying to facilitate reshoring through such means as monetary incentives.
However, Moon said it is doubtful that government’s policies can successfully entice companies to reshore because the administrative process to apply for incentives is too complicated. Also, the policies are mainly meant for small and medium-sized companies, but they are unwilling to reshore unless their main customers — large South Korean manufacturers — also reshore.
The government should address those issues to better encourage reshoring, he said.
Student loans
The fifth speaker, Cho Young-moo of the LG Economic Research Institute, delivered a presentation, titled “Will Increasing Student Loans be a New Risk to the Korean Economy (in Comparison with the U.S. Economy)?”
He first explained the student loan situation in the U.S.; something that has been growing as a major social issue and said, “South Korea is following the U.S.”
The economic conditions of parents have deteriorated due to early retirement and business difficulties facing self-employed people since the global recession in the late 2000s. The young generation’s ability to repay debt has been weakening due to high unemployment and a lack of quality jobs.
Education-related household debt grew to 28.4 trillion won ($26.4 billion) at the end of 2013, he said in his presentation.
Education-related household debt increased by 12.3 percent in 2013, compared with a 6 percent increase in total household debt, indicating education is a major factor in people borrowing money.
Student loans by the Korea Student Aid Foundation (KSAF) grew from 0.5 trillion won to 12.6 trillion won in eight years.
Meanwhile, the student loan delinquency rate increased from 3.2 percent in 2006 to 5.2 percent in 2012, and the number of people with cautionary credit ratings increased from 670 in 2006 to 41,691 in 2013.
Cho made policy suggestions at the end of his presentation. He said the government should improve efficiency of education-related expenditures, as education-related expenditures in South Korea are 6.7 percent of total household expenditures, as opposed to 2.4 percent in the U.S., 2.1 percent in Japan, 1.5 percent in Britain and 1.0 percent in Germany.
Also, the government should expand scholarships to lessen the financial burden on students.
Most importantly, he said the government should improve the employment situation for young people.
Free trade agreement
The last presenter was Kim Young-gui of the Korea Institute for International Economic Policy, who delivered a presentation, titled “Evaluation of a Decade of Korean FTAs.”
South Korea has free trade agreements, or FTAs, with 15 countries and regions, including the EU, U.S., Chile, Australia, Singapore and ASEAN, and is in negotiations with Indonesia, as well as two regions.
Kim showed in his presentation that FTAs increased the number of South Korean exports to its signing partners.
He also showed that FTAs positively affect trade values and the number of products traded between South Korea and its partners in many industries, especially in textiles, chemicals, iron and non-ferrous metals.
The number of both large and small exporters increased after FTA implementation.
Inward foreign direct investment (FDI) has also increased after the signing of FTAs, indicating evidence showing increased FDI from India, the EU and ASEAN.
His research team concluded that small and medium-sized exporters enjoy greater profit from FTAs than other companies.
Q&A
After the six presentations, Daito Bunka University professor Yuichi Takayasu moderated a Q&A session.
He asked about South Korean President Park Geun-hye’s growth strategy. In response, Jeon said that although the president’s growth strategy is moving in the right direction, it is not perfect.
“It may have only a temporary effect,” he said. “Also, there are always drawbacks in economic policies driven by governments. I am not sure companies will be strong in such a situation.”
He cited a British case as an example, saying the British government formed a platform for businesses, instead of taking the leadership rol.
Regarding Takayasu’s doubts about the likelihood of South Korean companies reshoring, Moon said a trend has started showing, but the ratio of companies that want to reshore is still as low as 5 percent.
The result of his research indicates there are quite a few companies that want to get their production capacities out of China, but South Korea is one of many destination candidates such as Vietnam.
Also, big companies such as Samsung Electronics do not want to reshore because they “have settled in the local communities,” he said.
Instead, makers of accessories, shoes and other consumer products have shown interest in reshoring, he said. “Those are the type of companies that does not do well domestically,” he added.
On future FTA strategy, Kim said South Korea will probably increase FTAs with developing countries. He also said the government should be prudent in FTAs and look out for the effects of agricultural product liberalization.
Source Article from http://www.japantimes.co.jp/news/2015/05/21/business/examining-koreas-japanization/
