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[Economic Opinion] Korea' surprising growth and sustainability through innovation

Recently released statistics by the Bank of Korea about the country’s economic growth was quite surprising, especially for those who used to have a rather gloomy picture about Korea. Above all, the bank revealed that Korea’s third quarter real GDP growth rate was 3.6 percent higher than last year’s. As the first and second quarter showed a 2.9 and 2.7 percent growth rate, respectively, a growth rate of 3.6 percent was undoubtedly quite astonishing. Thanks to this outstanding performance, perhaps, the bank readjusted its growth forecast for 2017 from 2.8 percent to 3 percent. IMF immediately followed suit by changing its growth forecast from 3 to 3.2 percent.

The prime reason for this rise was equipment investments. For the first two quarters, the equipment investment was increasing 4 to 5 percent over the last year, but it surged to 16.8 percent for the third quarter. Almost all the equipment investments were related to the Samsung Electronics building new semiconductor plants to meet global demands. Acknowledging that equipment investments take up about 10 percent of GDP, a 16.8 percent increase contributes 1.68 percent- age points to GDP growth.

Exports during this quarter also increased 5 percent over the last year, but imports increased 8.4 percent in the same quarter. Construction investments played some role in economic growth as it increased 7.5 percent during the third quarter. As to whether such a trend will continue isn’t certain, as the administration openly announced willingness to reduce public infrastructure investments to divert funds to welfare programs.

Reckoning that the country’s growth was due mainly to the unexpectedly great performance of equipment investments, it’s necessary to wonder if such investments will continue in 2018 and onward.

Projections by business analysts on the future semiconductor industry are basically divided; one group argues that the industry peak is imminently approaching, causing D-RAM prices to be stagnate, while the other group believes that the Fourth Industrial Revolution will cause overwhelming quantities of semiconductor products to be produced, rendering further boom and surge. It’s really difficult to pick which direction the semiconductor industry is heading towards, but one thing that is very clear by now is that Samsung’s projects for building new memory production plants in Korea is about done. Other than investing USD 70 billion into building such plants in China between 2017 and 2020, Samsung seems to have no further plan for establishing a memory plant in Korea.

Putting this uncertainty aside, it seems indubitable that the FOMC would raise the federal funds rate at least 0.25 percent within the next six months. Since almost everybody expected the rise, it might not have a drastic effect on the global economy. However, a slight increase in the interest rate would have a significant dampening effect on private consumption. And a recent move of the very strong Korean won (down from KRW 1150 to KRW 1097) per dollar in less than a month puts people, as well as officials at the Ministry of Finance, on edge. Why? Because the strong won will substantially hamper Korean export, on the one hand, and encourage imports on the other. And the labor market could suffer from rising unemployment rates as the minimum wage has increased a whopping 16.4 percent over the last year.

Against this backdrop, it becomes very clear that the role of the government is even more important to maintaining solid growth. Without the active role of the government, sustaining a growth rate of 3 percent might be difficult. So what kinds of programs should the government pursue?

So far, President Moon Jae-in and a key government official both revealed that Korea must follow innovation driven growth to sustain growth and create new jobs. Innovation of entrepreneurs and creative businesses should pave new ways of economic growth not just for themselves, but for the Korean economy. Numerous start-ups should flourish to absorb tens of thousands of college graduates, enabling them to utilize their fresh ideas as well as to make their own living. Nobody can disagree on the importance of innovation in creating sustainable growth.

But there are critical questions to be asked and answered beforehand. First, innovation in those already existing firms, especially of SMEs, is as important as that of start-ups. So far, almost all government programs with trillions of allotted money are about venture related projects. Very little resources are reserved for the existing SMEs suffering from competition. Creating jobs in venture start-ups but losing tens of thousands of jobs in traditional SMEs makes no sense at all. Substantial support should be directed towards SMEs so they can innovate themselves.

Another concern is about the way the government innovation projects are administered. Most of the projects are selected, administered and evaluated by government officials, who hardly possess professional expertise or industrial experiences. Private sector professionals or academic experts could participate in those projects but they are in most cases given only an advisory role. Thus, innovation can’t take place with just the government’s support. It requires participation and hard work of dedicated entrepreneurs; Korea’s future relies on an innovative government as well as serious entrepreneurs.

By Professor Se Don Shin
Dean, Sookmyung Women’s University

The above article does not necessarily reflect the views or position of KOTRA.

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