Reforms Are Urgently Needed to Revive Economy

Global investment banks paint a gloomy picture of Korea's economic growth this year. At the most optimistic end, Bank of America and Merrill Lynch expect Korea's economy to grow 1.4 percent this year, but Nomura forecasts a 0.1 percent contraction. At this rate, the International Monetary Fund believes Korea's economy will grow at a slower pace than Japan's 1.8 percent.

That the Korean economy is sputtering from 2.6 percent in 2022 to the low one-percent range this year is largely due to lackluster semiconductor exports and waning demand for Korean products in China. Microchip exports, which account for 20 percent of Korea's shipments, have been declining for the last nine months. Last month they fell 40 percent on-year. Exports to China have also dropped for seven straight months due to the coronavirus lockdown there and the intensifying cold war with the U.S., and now their proportion of Korea's exports has fallen below 20 percent.

Domestic consumption needs to be strong to compensate for declining exports, but Koreans are keeping their wallets shut as surging household debt surpasses W1.8 quadrillion to 156 percent of GDP (US$1=W1,326). The debt of small business owners stands at W960 trillion, and some of it becomes due in September. But the government's coffers, which should serve as a sturdy support, have been weakened by the populist policies of the previous administration. Fiscal debt is rising by W127 million a minute, and Korea must pay W93 trillion in interest alone over the next four years while tax revenues are expected to decline by more than W20 trillion this year.

The causes of the economic slump are structural and there seems to be no clear way out. That means the only momentum can come from private businesses. After semiconductor demand waned, cars including electric vehicles became the country's top export product, and rechargeable batteries have also become a lucrative support. Businesses must find new growth engines in the cutting-edge biotech and artificial intelligence industries, while the government must remove red tape. Taiwan's government went all out to support the country's semiconductor industry, which evolved into a key pillar of the island country's economy and enabled it to overtake Korea in terms of per-capita income last year. The government must waste no time pursuing labor and regulatory reforms so businesses can strive for innovation. Unless it does, the country might fall into the same low-growth trap that ensnared Japan.