Who will peak first, China or Korea?

Without a vision to hone economic efficiency, productivity and innovation, Korea could reach its peak much faster.

Lee Hyun-sang

The author is a senior editorial writer of the JoongAng Ilbo. The 1997-98 foreign exchange reserve crisis in Korea — often referred to as “the IMF Crisis” by Koreans themselves, as they sought the IMF-led bailout — is actually called “the Asian financial crisis” in the international community of economics. The currency and liquidity crisis was regional, as it did not spill over to the rest of the world — and largely stemmed from the developmental features of rapidly emerging Asian economies. American economist Paul Krugman was one of the first who foresaw the crisis based on his diagnosis of such vulnerable economies. For instance, he claimed the dynamic growth of Asian-tiger economies was a “myth.”

Krugman read the dangers in the total factor productivity (TFP) which measures factors influencing productivity beyond the traditional labor and capital inputs — such as technology advances, labor-management relationship, corporate management structure, law and system changes — to understand the “unobservable” capabilities and potential of a country. Asian economies achieved rapid growth through the traditional labor and capital inputs, but they reached limits in their growth model. They were like a coal-powered steam engine coming to a stop after they ran out of coal. They were unaware that fast-speed trains were running in other advanced parts of the world.

A quarter of a century has passed since. Can Krugman’s argument — that the myth of East Asian economies was based on “perspiration” not “inspiration” — be effective now? Maybe so. The epicenter this time is China. China could circumvent the Asian financial crisis of the late 1990s, as it opened its market yet kept its financial sector closed. Unbattered China helped Korea rebound fast from the bailout by fueling its post-crisis growth.

But China’s accumulated flaws and complexities have begun to surface. The downfall of property giants such as Evergrande Group and Country Garden has triggered the contagion scare. According to the Korea Economic Research Institute, China’s average TFP growth from 2015 to 2019 hovered 1.8 percentage points below the OECE average. It has become the world’s second-largest economy, but its efficiency continues to lag.

In a World Bank report, China’s investment in infrastructure and hard assets made up 44 percent of the GDP between 2008 and 2021 — nearly twice bigger than the global average of 25 percent and the U.S.’s 20 percent. China had been shoveling coals like crazy to run its steam-engine economy. The intensifying conflict with the United States has complicated its plan to upgrade its engine. The more China seeks self-sufficiency to confront the U.S., the harder its technology advancement becomes — a sad reality for a technology-weak country of its mammoth size. A study predicted the country’s TFP growth will fall 0.3 percentage points when its import-to-GDP ratio falls one percentage point.

But China won’t easily come down. The so-called “red lines” to curtail bank loans triggered a slump in its real estate market, but Beijing is hardly panicking. The central bank cut the one-year loan prime rate (LPR) — which serves as the base rate — just 10 basis points. In a speech published recently on the Qiushi, the Chinese Communist Party’s theoretical journal, President Xi Jinping re-emphasized his political slogan of “common prosperity” to imply his confidence in coping with the ongoing economic troubles. The politburo of the Communist Party said that China’s economic recovery will proceed in a “wave-like” fashion in a “tortuous” process.

It would be premature to declare the Chinese economy has reached its peak. Since the behemoth economy has ascended to the mid-income group, some correction is inevitable. We need to examine why Korean products have less value in China than before — more specifically, whether it resulted from sluggish demand in China or weakened competitiveness of Korean products. China is still a major market for Korea, accounting for 20 percent of its outbound shipments.

In its latest article titled “China’s 40-year boom is over,” the Wall Street Journal cited the IMF’s forecast that China’s GDP growth will slow to less than 4 percent in coming years. What does the slowdown in China mean for Korea? The IMF expects the Korean economy will grow 2.2 percent in the 2020s and 1 percent range after 2030. From the data, we should be more worried about reaching our peak.

Korea certainly recovered from the foreign exchange reserve crisis fast and shaped up well financially over the decades. But whether its economic efficiency has bettered is doubtful. According to a Federation of Korean Industries study in February, Korea’s TFP hovers below the levels of the Group of Five economies — the U.S., Japan, Germany, Britain and France. When the United States’ TFP is referenced as 1, Korea is 0.614. The country scores most poorly in social capital and regulatory reform. The low trust in the government and systems, as well as stifling regulations on the private sector are slowing its productivity. Even though massive household debt exceeding the GDP is suppressing consumption, the government is passive in addressing it in fear of upsetting the soft-landing of the property market. President Yoon Suk Yeol’s obsession with fighting against what he called “bureaucratic-industrial cartels” will lead to a cut in state investment in research and development. Without a vision to hone economic efficiency, productivity and innovation, Korea could reach its peak much faster. Krugman’s warning is still haunting our economy.