South Korea should brace for economic difficulties ahead: The Korea Herald

The landmark Namsan tower rises above the city skyline in Seoul on Nov 30, 2015.
The landmark Namsan tower rises above the city skyline in Seoul on Nov 30, 2015. PHOTO: AFP

In its editorial on Jan 4, 2015, The Korea Herald says it is highly likely that the South Korea economy will remain in its low-growth trap this year.

One year ago, government economists said that the South Korean economy would be able to recover its vitality in 2015 because the nation - with no election set in the year - would push for structural reforms, and there were favourable conditions such as the low price of oil, low interest rates and depreciation of the South Korean currency.

President Park Geun Hye confidently said in her New Year's news conference that the South Korean economy would grow 3.8 per cent in 2015.

But those predictions were too rosy, as the Korean economy expanded only 2.5 per cent for the year, marking the fifth year with a growth rate of less than 3 per cent. Considering the vast monetary easing and other pump-priming measures, this lackluster performance was all the more disappointing.

It is highly likely that this year, too, the economy will remain in its low-growth trap. Ms Park's economic lieutenants say the economy will grow 3.1 per cent in 2016. This projection is lower than the 3.6 per cent forecast for the world economy, but private economists are skeptical of even this projection.

There are a combination of reasons for such dismal prospects. Externally, the growth of the world economy has been slowing down for years, the Chinese economy is not doing well either, and the low oil prices are further pulling down global growth.

Internally, our once proud industries like shipbuilding and steelmaking are being overtaken by Chinese competitors, while traditional rival Japan is taking advantage of the weak yen to boost the global competitiveness of its industries.

In addition, structural reforms are not progressing as successfully as forecast by the Park administration. Korean exports contracted for the first time in five years, consumption is still sluggish and the problems of debt - at all the household, government and public sector levels - and the situation of marginal firms have reached dangerous levels.

This reality calls upon the nation to seek fundamental solutions, which should include, among other things, efforts to develop the services sector and seek a shift in strategy for major manufacturing industries.

The history of South Korea's economic development is identical to the history of light industries like textiles and then those of heavy industries like shipbuilding, petrochemical and steelmaking, which still remain the mainstay of the economy.

South Korea cannot achieve a second leap by relying only on the traditional industries and without fostering the services sector. The manufacturing sector needs to learn lessons from the Chinese, who have been expanding their control of global markets through brisk offshore investments as well as mergers and acquisitions.

South Korea also needs accounting firms, hospitals and financial firms with global reputations corresponding to those of Samsung and Hyundai Motor.