Around December every year, many economists and analysts anxiously await the biannual economic policy directives for the upcoming year, usually administered and arranged by the Ministry of Economy and Finance. The last one published on July 2019, for the second half of this year emphasized three prime targets, namely economic revitalization, innovation, and the promulgation of an inclusive economy. To effectively substantiate these three goals, the ministry stipulated five specific policies for each of the three targets. Regarding the target of economic revitalization, for example, the plan stresses boosting investment, consumption, export, and regional economies with tight risk management. Under the innovation target, there included ways to pace up innovation, to achieve tangible results, to innovate manufacturing as well as the services industries, and to prepare for demographic changes.
Although put in separate categories, economic revitalization and innovation are not divided entities. They are just different aspects of a single object. Economic revitalization can only be achieved through innovation. If economic revitalization is sought after without innovation, such as purposeless building of roads, railways or airports, the economic consequences will be more severe recession and inefficiency. Therefore, economic revitalization must be an outcome stemming solely from innovation. Consequently, the three different targets should be understood as an integral body as revitalization through innovation with the special concern of achieving a fair and inclusive economy. These main themes of the last policy directives in July 2019 is not expected to change significantly for the directives in the year 2020. More focus and resoluteness should be given to accelerate economic revitalization and innovation in the coming plan, because the Korean economy needs economic vitality in investment and private consumption through innovation more than any other time.
This necessity becomes even greater in view of the fact that investment, private consumption and economic growth dynamics have substantially stalled for the last half year. Private consumption which was growing more than 3 percent previously has dropped to less than 2 percent, and investments showed negative growth for 6 consecutive quarters. At the core of this malaise is the global slowdown in trade. Growing faster than 10 percent in the year 2017 and 2018, global exports dropped to negative growth in 2019. Numerous forecasts foretell even gloomier pictures ahead in the year 2020. A small country like Korea has no power to reverse the course of headwinds in the global trade environment but can only learn to adapt to it. In this respect, the 2020 policy directives seem more crucial than in any other years before.
Here are some of the focal points that the policy plans should include. First, the plan should contain very audacious and bold incentives to investments to put an end to the long streak of the decline in fixed investments. Investment is at the core of future economic growth, and it is the playing ground of innovation. Investment is the key for sustained economic growth and the stepping stone for upgraded economy. Statistical researches showed that a 1 percent increase in investment means a 0.16 percent growth for Korea. In other words, a 10 percent increase in investment contributes to a 1.6 percentage point increase in economic growth. Investment is the creator of jobs, income and technology. Investment is the most powerful contributor to employment. The very success of J-nomics, namely the economic policy of President Moon Jae-in, lies in investment.
Second, as it has been in the past few years, measures to promote fair trade or the grand goal of wiping-off old evils should be conducted in a careful and meticulous way as it should not arouse another round of ice-age among businesses. After a series of talks and discussions, the ministry has already outlined five major categories of structural reform in the 2020 plan. The five areas of reform consist of industrial innovation, public sector, labor market, adjusting to demographic and technological changes, and building social infrastructures. Here, the ministry emphasized labor market reform above anything else, because it Korea’s labor market competitiveness needs to be boosted. Fortunately, issues of fair trade or the wiping out of old evils do not play a central role in the coming 2020 plan. Also illuminating is the role of social capital in transforming the Korean economy. The final words that need to be added to the 2020 plan are that a tangible outcome must be seen by the end of 2020, and that the participation of the private sector is crucial.
By Professor Se Don Shin
Dean, Sookmyung Women’s University
The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA