Why is Korea Falling Behind?
Today, Chosun Ilbo ran this piece on “What’s Behind Korea’s Falling Economic Ranking?”
Although such rankings are practically meaningless in our interconnected global economy, the article does make a few points that are worth considering. Once again, blue is the Chosun, black is me.
According to the World Bank’s rankings of nominal gross domestic product (the value of all goods and services produced in a country expressed in current prices) released on Monday, Korea stands at 15th place, after Australia. In 2003 Korea ranked 11th. Experts say the biggest reason behind the fall of four notches in just five years is lost growth momentum.
◆ Weakened Growth Momentum
Korea’s annual economic growth rate hovered between four to five percent over the past five years, while the economies of newly-emerging countries, such as China, Brazil and India, expanded close to 10 percent annually over the same period.
Sometime, Korea is going to have to stop comparing itself with developing nations. Granted, when the entire globe becomes developed, it is unlikely that Korea will be in the top 5 by real GDP. However, companies and the government mustn’t think about Korea’s place in terms of short-term economic growth, but of global industry share. Korean companies have been consistently poor performers when it comes to international expansion. In order to remain key players, Korean firms need to expand aggressively in the global arena over increasingly narrow product categories. Korea’s downgrade isn’t telling us about the growth trends of China, India, and Brazil, but about how Korean firms aren’t aggressively positioning themselves in these markets.
The article does hone in on the second reason for declining growth: piss-poor FDI.
“Korea is losing its growth momentum as investment has dropped markedly since 2000,” said Kwon Soon-woo, an economist at the Samsung Economic Research Institute (SERI). “With investment declining, Korea’s potential growth rate (the expansion that can be achieved if a country’s financial resources and labor force are put to full use) and real growth rates have been lackluster,” he added. Korea’s potential economic growth rate was 4.5 percent prior to the global financial crisis. But as investments have fallen drastically both last year and this year, it is estimated to have decreased further
And why is investment (both domestic and foreign) declining? DongA Ilbo’s recent survey of 60 foreign firms doing business in Korea is telling. The firms give the following list of obstacles for doing business in Korea
- Over regulation
- Excessive corporate taxation
- Unreasonable/unyielding labor unions
- Language barriers
- Instability due to North Korea
- High cost and low productivity
It’s telling that at least 4 out of 6 of these are completely controllable phenomena. And ‘high cost and low productivity’ could arguably be a product of the first 4 factors.
◆ Effects of Consumer Prices and Foreign Exchange Rate
The effects of rising consumer prices are directly reflected in nominal GDP. The more consumer prices rise, the larger nominal GDP becomes. “Until now, Korea maintained stable economic growth and consumer price levels, while Brazil, India and Russia’s nominal GDP are getting bigger due to high consumer price increases on top of high economic growth,” a Bank of Korea official said. Resource-rich Australia became the world’s 14th-largest economy last year thanks to growing exports and GDP, as raw materials prices have been climbing since 2006.
Again, Korea needs to stop comparing itself with developing countries – inflation in Korea has been on par with or in excess of that in other developed nations. Yet the US, Germany, France, and a slew of other developed nations maintained comparative real GDP over the timeframe.
In contrast, Korea’s consumer price increase was offset by the weak won. Nominal GDP is calculated in won and then converted into U.S. dollars. As a result, nominal GDP shrinks if a country’s currency is weaker than the dollar, even if consumer prices in that country rose. The Korean won was worth W955 against the dollar on average in 2006, W929 in 2007, but weakened to W1,103 in 2008.
Although a factor, it must be said that the won is part of Korea’s competitive mix. Korean won value fluctuation isn’t an exclusive or completely random phenomenon. How the won fares against the pound, yen, euro, dollar, rupee, etc. is every bit as integral to Korea’s global competitiveness as is the quality of Samsung LCD TVs. It boggles my mind that the bank of Korea claims the ranking is too low due to weak currency. If BOK doesn’t take responsibility for Korea’s currency. Who will?
◆ Need for New Growth Engines
Experts say investment needs to rise in order for Korea to boost its global economic ranking. “Korea remains competitive in exports, but private consumption and investment remain weak. Korea’s domestic economic structure needs to be strengthened by reviving private consumption and Institute, said, “Korea’s economy could grow faster in the future, because Korean products have been increasing their share of the global market since the global financial crisis.” But Oh advised that Korea needs to tap into new growth engines in order to return to its previous rate of growth, since it would be difficult for the government to shift back to a strong won policy as officials seek to maintain the country’s current account surplus.investment,” Kwon at SERI said. Oh Moon-suk, a senior economist at the LG Economic Research.
I absolutely agree with this assessment. Korea, like all developed nations needs new growth engines, new entrepreneurs, new ideas, new business development. Experts at places like SERI and LG Economic Research Institute are hoping these new growth engines will spawn from within their organizations. And they will. But the government needs to work on a system for promoting SME development that promotes healthy competition – not an easy task mind you, but crucial to long term growth.
