050101kreHerald

01.01.2005 The Korea Herald
[EDITORIAL] Old problems, fresh efforts

The Year of the Rooster has dawned, bringing with it tough challenges for the Korean economy. The economic prospect for this year is hardly bright since global as well as domestic environment are forecast to worsen rather than improve. For one thing, the global demand for Korean goods, which rose to a new record last year, is seen weakening sharply this year, while domestic demand is expected to remain depressed.

This unfavorable environment at home and abroad alone makes the challenge for economic policy-makers arduous. Most think-tanks have already projected that Korea's economic growth rate would fall to around 4 percent or lower this year from last year's estimated 4.7 percent. Defying these forecasts, however, the administration has set its growth target at 5 percent to demonstrate its will to jumpstart growth.

This year, policy-makers face a more daunting task: they should buckle down to wrestle with intractable structural problems that have long been shunned. Last year, concerns began to arise that the economy might slide into a permanent low-growth trap due to structural problems.

Analysts explained that economic actors have lost confidence in the future following the 1997-98 financial crisis. The post-crisis reforms, while improving corporate financial health and transparency, have made companies more averse to risk, causing a drop in investment. The reforms have also exposed corporate employees to constant layoff threats, inducing them to reduce spending, which in turn weakened domestic demand.

Furthermore, major industrial fields, including the small-firm and service sectors, are plagued by deep-rooted structural problems. Because of the lack of an effective restructuring mechanism, productivity in these sectors remains low. This not only retards the development of these sectors but ultimately undermines the growth potential of the economy.

These and other structural weaknesses have fueled the pessimistic outlook on the economy. Hence many see this year as a year of reckoning for the economy in the sense that whether it succeeds in recovering its dynamism or fall into a low-growth trap will be determined this year. This lends urgency to the task of resuming the restructuring process in many fields, however painful it may be.

Policy-makers have to formulate and implement the economic management plan for this year with a clear realization of the magnitude of the challenges they confront. On Wednesday, they released a thick document outlining their policies. It offered a long list of action plans. But the emphasis was unmistakably on short-term goals.

Finance Ministry officials said, for instance, their overriding goal for this year is, as in last year, to create 400,000 jobs. To attain this goal, they say, it is necessary to boost the economic growth rate to around 5 percent, which is the estimated potential growth rate of the economy.

The focus on job creation is understandable, given the urgent need to boost consumption to reinforce ever-slumping domestic demand. Yet we advise policymakers to put equal priority on tackling structural problems to improve the economy's long-term growth outlook.

To spur private investment, the administration plans to implement a 5-trillion-won investment scheme aimed at building diverse welfare facilities, houses and infrastructure. This may help create jobs. But it will have little effect on stimulating private investment.

The best way to stimulate private investment is to help corporations secure competitiveness in new technologies. Companies that have secured global competitiveness based on technological prowess are bold in investment, as demonstrated by Samsung Electronics and LG.Philips LCD Co. Samsung, for instance, decided to invest a total of 21 trillion won this year, increasing facility investment by 13 percent and R&D investment by as much as 19 percent.

In this respect, we advise policy-makers to increase public investment in research and development of the 10 leading-edge technologies which were selected as the future engines of growth. After initiating R&D in these technologies, they need to encourage private companies to participate in joint R&D projects.

To facilitate job creation, the administration also plans to reinvigorate the venture sector. It plans to provide financial support totaling 12 trillion won over the next three years. While the intention to stimulate the venture sector is beyond reproach, it should do so in a market-friendly way and minimize its direct involvement. It should avoid providing too much financial support to venture companies because it will create a bubble.

In trying to revive the economy, policy-makers would not be able to go very far, however hard they work, if they fail to win support from the political establishment. Last year, the sharp confrontation among political parties contributed to worsening the economic performance. Finance Minister Lee Hun-jai said political factors knocked off at least 1 percentage point from the growth rate.

In particular, President Roh Moo-hyun and politicians in the ruling Uri Party deserve a big slice of the blame for polarizing the nation, causing confusion and adding to uncertainties in the economy. This year, we hope they refrain from pursuing politically charged agenda that have little to do with improving people's economic welfare.

We also urge the political parties to avert unnecessary clashes this year and make the political process more predictable. This will help reduce uncertainties in the economy. Political leaders should focus on creating an atmosphere that is less confrontational and more conducive to growth. The ruling party declared that it would put top priority on revitalizing the economy. We hope the party's recalcitrant young lawmakers toe the party line.

2005.01.01

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