[Column] Weathering the storm in 2023 and beyond

Lee Jong-wha

The author, former chief economist at the Asian Development Bank and a senior adviser for international economic affairs to former President Lee Myung-bak, is a professor of economics at Korea University and president of the Korean Economic Association.

The South Korean economy is navigating through a great storm. Dangers are towering like roaring waves. But where the ship is headed is uncertain.

Many economic institutions and international organizations predict the global economy to grow in the 2 percent range next year. If the Russia-Ukraine war continues to cause a further rise in energy prices, global growth rates could be capped at around 1 percent in 2023. Recession could spread around the world. If the Chinese economy declines rapidly due to its Covid-19 lockdowns and real estate market hits crisis, the global economy could fall further. If the Federal Reserve continues lifting the benchmark rate, the international financial market will become more volatile and emerging countries could suffer a fiscal, and financial, crisis.

Upon the arrival of a complex crisis, the Korean economy won’t easily bounce back from the slump. The Bank of Korea estimates a growth of 1.7 percent for next year, but the economy may underperform that level.

Despite manifold challenges, next year won’t be as bad as 2020 during the pandemic or 2009 amid the global financial crisis. The global economy contracted 0.1 percent in 2009 and 3.0 percent in 2020. Korea’s economy grew 0.8 percent in 2009 and contracted 0.7 percent in 2020. Next year could turn out better than expected. Recovery will pick up if the Ukraine war ends, the U.S. Federal Reserve pauses or suspends tightening, and the Chinese economy does well on stimuli measures.

The government, companies and households must brace for potential dangers next year. The government must strengthen control over external and domestic risks, stimulate domestic demand and support exports for stable growth, while tending to the vulnerable. Companies must secure liquidity against a global recession coupled with high inflation, high interest rates and strong dollar and save costs to raise efficiency. Households must lower debt and refrain from excessive investments in risky assets.

Readiness must go beyond 2023, as the economy will continue with a boom-bust cycle. The global economy was facing a great wave of change even before the pandemic. As digitalization has accelerated, new innovations like artificial intelligence, robotics and bioengineering have become the new growth engine for the global economy.

Global supply chains have been rearranged to cause de-globalization. Response to climate change and carbon reduction have become crucial. Individual consumption and labor behavior have also changed. Effective management of public finance and mid-term fiscal integrity have become essential. Demand for corporate responsibility also grows.

Korea has been slow in responding to the fundamental changes in the world. It has been laggard in developing core technologies and breeding the new industries and skills required. Economic security has also become unstable due to conflicts between superpowers and changes in the international order.
 

Sohn Kyung-shik, center, chairman of CJ Group and chair of the Korea Enterprises Federation, makes a joint statement to overcome a colossal economic crisis together with representatives of six major business organizations at the Korea Chamber of Commerce and Industry (KCCI), Nov. 24.

In the meantime, low growth and wealth polarization have become a fixed feature. The share of senior citizen aged 65 and older, currently 17 percent of the population, will reach 36 percent in 2040. As the working population declines, productivity improvement has stagnated to help bring down the potential growth rate. The OECD projects Korea’s growth rate at 0.2 percent in 2040. As income and wealth distribution remain imbalanced, the gap across industry, companies and region has worsened.

The Korean economy has been lacking in structural reforms necessary to survive the imminent danger and keep to the stable path for the next 20 years. Upon inauguration in May, President Yoon Suk-yeol promised to ease government regulations and reform the labor, pension, education and public sectors. But his government has been making little progress in the face of the mighty opposition and strong protests of parties of interests on top of its lack of drive. According to a joint survey by four associations — the Korean Economic Association, the Korean Academic Society of Business Administration, the Korean Political Science Association, and the Korean Sociological Association — 65 percent of scholars and 79 percent of corporate leaders said Korea was not heading in a desirable direction on the economic front. In addition, 55 percent of professors and 68 percent of business leaders found regulations the same or worse under the current conservative government.

Scholars from Korea and Japan gathered last week for the 2022 Korea-Japan Economic Forum with low growth as the theme. Japanese scholars pointed to the rapid speed in aging, sinking productivity and worsening fiscal integrity in Korea. They advised that repeated populist policies and delayed structural reforms will endanger Korea’s future. The country would probably experience the same lengthy stagnation Japan underwent in the 1990s and 2000s. The Japanese economy grew a mere 0.8 percent on average over the past three decades. Korea must draw lessons from Japan if it does not want to walk down the unfortunate path of Japan. Excess regulations should be removed to motivate corporate investment and innovation. Labor regulations should be eased and the relationship between labor and management stabilized. Women and the elderly must work more. Education must be reformed to provide more equal opportunities and groom creative minds. Investments in new technologies should be increased and promising industries should be supported for effective pursuit of a new growth strategy.

“Fear can hold you prisoner. Hope can set you free,” according to a quote from the film Shawshank Redemption. One can survive today’s hardship if there is hope for the future. I hope all survive next year’s challenges and the government makes progress in its reform drive so the country will be filled with hope.

Translation by the Korea JoongAng Daily staff.