In his year-end press conference earlier this week, Finance Minister Hong Nam-ki said that the government would put top priority on reviving the country’s sluggish economy.
Hong, who doubles as deputy prime minister for economic affairs, cited the industrial output data for November, which gained 0.4 percent on-year and rebounded from a 0.4 percent decline a month earlier, as a “positive” sign that the economy may have bottomed out.
The government forecasts that the South Korean economy will grow 2.4 percent this year, following last year’s estimated 2 percent growth.
The 2019 figure marks the lowest since 2009, when the economy grew 0.7 percent in the aftermath of the global financial crisis.
The government hopes that a series of policy measures coupled with an anticipated recovery in the semiconductor sector will help Asia’s fourth-largest economy rebound in 2020.
A mix of fiscal stimulus and monetary easing could bolster sluggish domestic demand and a recovered global chip market might lead to an upturn in the country’s exports, which fell for the 13th consecutive month in December. Chips account for more than one-fifth of outbound shipments from the country.
But many economists and corporate leaders remain skeptical about the possibility of the economy achieving the growth target set by the government. Some expect the 2020 growth rate to fall below 2 percent, with the economy yet to hit the bottom.
The main reason for such a pessimistic outlook is the government’s adherence to an anti-corporate stance.
Since taking office in May 2017, President Moon Jae-in’s administration has implemented a string of measures that have increased the burden on companies. Among them were steep minimum wage hikes, a rigid application of the shortened workweek and raising corporate tax rates.
The government has attributed the unimpressive economic performance mainly to unfavorable external conditions, including the protracted trade spat between the US and China, the world’s two largest economies.
But it should be noted that Korea’s estimated 2 percent growth last year is far below the 2019 global growth rate, which is expected to reach 3 percent.
If the country’s economy achieves the government-set goal of 2.4 percent growth this year, the figure would still fall short of its potential growth rate estimated at 2.5-2.6 percent.
President Moon recently pledged to strengthen support for companies. But he has done little to turn his repeated rhetoric into substantive measures. Rather, his government and the ruling party have added restrictions on companies by prodding the state pension operator to intervene in the management of private firms and toughening environmental and safety regulations.
Moon and his economic team should listen to the business community’s calls for drastic deregulation and other concrete steps to boost corporate activity.
Leaders of local business groups were not exaggerating when they expressed concerns in their New Year’s messages that the country’s economy stands at a crossroads of rising again or collapsing.
The government says it will encourage private companies to spend 25 trillion won ($21.6 billion) for large-scale investment projects this year. Without lifting complex regulatory restrictions, private sector investment can hardly be expected to increase.
The planned increase in fiscal spending this year is mostly allocated to create temporary jobs, fund pork-barrel projects ahead of April’s general elections and cushion the negative impact of the administration’s ill-conceived policies. This expenditure cannot be anticipated to make a significant contribution to growth.
With adequate liquidity, questions are being raised about whether additional monetary easing is appropriate.
In a statement last week, the Bank of Korea said it would keep its monetary policy accommodative this year to support the recovery in growth and ensure the rise in consumer prices, which gained 0.4 percent last year, marking the slowest since 1966, when the state statistics office began compiling related data.
The central bank is expected to deliver another rate cut in the early part of 2020. It has slashed its benchmark rate to a record low of 1.25 percent through two cuts by a quarter percentage point in July and October.
But lower rates could further push up home prices, increase household debt and precipitate the outflow of foreign capital.
The central bank also plans to increase the purchase of state bonds in a way to expand liquidity. An oversupply of liquidity could create a bubble in the economy, which would eventually burst, plunging the economy into more severe trouble.
It should be noted that the protracted economic sluggishness has stemmed not from a shortage of money supply but the withering of corporate activity due to anti-business measures taken amid rising external uncertainties.
Both the government and the central bank should put their policy focus on galvanizing corporate activity and enhancing the country’s growth potential through regulatory, structural and labor reforms.