[Column] Don’t dismiss warnings about the next 10 years

Politicians must give hope by devising emergency action plans to mitigate the deepening concerns about a lengthy slump.

Jun Kwang-woo

The author, a former chairman of the Financial Services Commission, is chairman of the Institute forGlobal Economics.

Recession may beat inflation as the economic keyword for 2023. The signs are clear for the Korean economy. Due to a sharp downturn in the chip cycle and a plunge in exports, the trade balance has been in the red for the 13th straight month, the longest streak in 25 years since the 1997-98 Asian financial crisis. The trade deficit in the first quarter has already exceeded half of last year’s annual deficit to underscore the severity of economic slackness. The current account has been in the red for two consecutive months for the first time in 11 years, an omen of an economic crisis.

The International Monetary Fund has slashed Korea’s growth outlook for this year to 1.5 percent after three earlier cuts. It lowered the growth estimate for the global economy for the next five years to an average of 3 percent per annum, 1 percentage point off from the average growth of the last 30 years. The fragile banking sector has added to financial stability concerns, sending the IMF to warn policymakers around the world of a “hard landing.” The Bank of Korea has held the base rate steady at 3.5 percent for two straight meetings to suggest the shift of its policy focus on responding to the economic slowdown and financial instability. Some international investment banks are doubtful if the Korean economy can see a growth of more than 1 percent this year. The Korean won has stayed weak on growing pessimism about the economy.

The World Bank warned the global economy could face a “lost decade” in growth. The global economy has flourished over the last 30 years on high growth and loose liquidity from low rates thanks to active free trade and cross-border investments under the globalization wave. The next decade would see a lowered productivity due to a weakening in investment growth, a declining labor productivity from aging and a slowed growth in trade. The bank lowered its estimate for the potential growth rate of the global economy to a 30-year low of 2.2 percent a year from 2023 to 2030, compared with 2.6 percent from 2011-2021 and 3.5 percent in the early 2000s. The dim global outlook bodes ill for the Korean economy, which is underperforming the global average.

Korea may become fixated in the $30,000 per capita income trap if it cannot avoid a lengthy stagnation. Ireland was the fastest in elevating to the $40,000 range just a year after passing the $30,000 threshold. Japan, Canada and the Netherlands made the jump within three years. But Italy, Greece and Spain are mired in the $30,000 range. The stagnated economies commonly suffer rigidity in the labor market, low productivity, high national debt levels and unstable political and social environment.

Italy sets a typical example. It broke the $30,000 threshold in 2005 and reported $35,000 last year, its 18th year in the $30,000 range. Italy has turned decisively left with populist governments opting for costly policies like basic income. Expansionary policy stretched debt, and excessive debt weakened growth, feeding the vicious cycle of low growth and generating more debt.

Low growth and aging have worsened the matter. The ratio of adults aged 65 or older is 27 percent of the Italian population, close to Japan, the most aged society. The total fertility rate is 1.6, the lowest in Europe. Talented and skilled workers are migrating to Germany, France and Britain.

Simon Kuznets, a former professor at Harvard University who invented the concept of gross national income and gross domestic product during the Great Depression, had said there were four kinds of countries: developed countries, underdeveloped countries, Japan and Argentina.

Korea has made a staggering transformation from one of the poorest to close to the rich group. But sadly, it suffers the weaknesses of all four types. It shares the weakness of developed countries of a fixated low growth from the world’s bottom fertility rate and low saving rate. Its political habitat chained to the past dogma and relying more on speculation than science is no different from underdeveloped countries. The surge in national debt and lethargic economy remind us of the symptoms of lengthy stagnation and the lost 20 years of Japan. And Korea mirrors Argentina’s repeated crisis from fiery union activities and populist public policies.

The complex comorbidities have caused Korea’s potential growth rate to fall under 2 percent. Poor labor productivity — the lowest among the OECD members and hovering at 57 percent of the U.S. and 63 percent of Germany — is largely behind its sinking potential growth. As the next decade beholds greater geopolitical risks, climate change and challenges from industrial transition, Korea cannot expect hope in the future if it does not immediately address such complications.

Korea needs a dramatic breakthrough to break out of the $30,000 trap and join the OECD average of $40,000. But the government neglects to adopt fiscal rules to ensure the integrity of public finance, while the rivaling political parties are bent on expanding the preliminary feasibility review exemptions for their pork-barrel projects. Korea is walking down the sad path Italy has gone through.

“Watch your thoughts, for they will become actions. Watch your actions, for they’ll become habits,” former British Prime Minister Margaret Thatcher famously said to emphasize dignity and liability behind words and actions. Upright thoughts and behaviors, and policies and strategies for the future — not for immediate political gains — are the foundation for national capabilities. Politicians must give hope by devising emergency action plans to mitigate the deepening concerns about a lengthy slump. That is the only way the country can safely avert a path to the “lost decade.”

Translation by the Korea JoongAng Daily staff.