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By Choi Sung-jin
Unless Korea sharply enhances its labor and corporate productivity and actively pushes for industrial restructuring, the nation could fall into the trap of a "crisis-recurring economic structure," experts warned at a recent forum.
Such concerns may not prove groundless if the nation's quarterly economic growth rate remains in the 0 percent range and the administrative vacuum resulting from the ongoing scandal involving President Park Geun-hye and her close confidant becomes reality, they said.
Worse still, most industrial countries are now competing to get ahead of others in the "fourth industrial revolution," but Korea lost the "golden time" for economic revival when regulatory reforms related to it foundered recently.
Participants made these and other points at an industrial forum organized by the Korea Development Institute.
"We have issued warnings over the past few years about serial insolvencies of large and midsize companies and the slump of the real economy caused by China's economic slowdown," said Professor Park Sang-in of Seoul National University. "If the recent business setback develops into another economic crisis, Korea's economy is highly likely to change to the ‘Latin American cycle.'"
The Latin American cycle is also called the "M-curve," as economic crises and short-lived rebounds repeat like the letter M. Once a nation falls into this cycle, it experiences stagnant income, slumping consumption and declining exports, and is unable to get off the low-growth track.
Signs of a protracted slump are everywhere. The Korean economy grew 2.6 percent last year, but nearly half of it, or 1.1 percent, was made thanks to unsold inventories, according to the Bank of Korea. In other words, even the lower than 3 percent growth might not have been possible if the factories had not turned out products regardless of whether they were being sold.
The nation's growth potential – the maximum growth rate without triggering inflation and a measure of the economy's basic strength -- is also falling rapidly.
"If a strong shock hits the Korean economy when its potential growth rate drops to the 1 percent range and restructuring stalls in the next administration, the days when the nation struggles in the 0-percent range growth track can come earlier than expected," said Professor Kim Se-jik of Seoul National University in his recent paper.
The increase of chronically marginal businesses, or corporate "zombies," which cannot pay interest with their operating income, has also emerged as another burden on the economy. Central data shows the number of "zombies" increased from 2,965 in 2012 to 3,278 at the end of June. Of the total, 524, or 13.7 percent, are large enterprises.
"In a country like Korea, where economic concentration on big businesses is very high, the troubles of large companies can lead to a crisis in the overall economy," Professor Park said.
These warnings are hardly new, though.
Researchers at 10 state think tanks and professors of major universities launched a long-term strategic project and issued a report in late 2015. The report called for the government to change the nation's economic paradigm and deal with the changing environment more effectively, but pointed out that policymakers are following the example of Japan's two lost decades.
For example, Korea is ranked at the bottom in preparing for the fourth industrial revolution, which most industrial countries regard as the new breakthrough for further growth.
According to the World Economic Forum, Korea's preparation for the fourth industrial revolution was in 25th place early this year, the lowest among countries surveyed. Slow adaption to industrial structural changes, including lagging labor productivity, was cited as the main reason.
Singapore, which has drastically raised the proportion of service industries, maintained an average growth rate of 6.3 percent a year from 2003-2013 but Korea's annual rate, which stood at 6.5 percent in the 1992-2002 period, slowed to 3.8 percent in 2003-2012.
"The vertical division of labor at businesses, which was the engine of growth in assembly-processing industries of the past, is hindering innovation and large businesses' slashing of supply prices has kept their smaller suppliers from accumulating capital for innovation," said Kim Ju-hun, a senior fellow at KDI. "It is time the government made regulatory reforms actively to create a more flexible economic structure."
