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[Economic Opinion] Slow but steady growth for Korea’s economy in 2018

The year 2017 was full of surprises, including an impeachment and dismissal of former President Park Geun-hye and the inauguration of a new president soon after. On May 9, Moon was elected as the 19th president of South Korea and was hurriedly sworn in to the office next day. Throughout his campaign, President Moon had unveiled a number of eye-opening promises including raising the minimum hourly wage to KRW 10,000 (USD 9.3) and setting the maximum number of work hours per week at 52—both of these changes were regarded as radical or premature by businesses.

Most policy plans President Moon had revealed in his office were geared to create jobs for the relatively less privileged like young women or newlyweds. But the most surprising and probably most controversial package in his job policy was the creation of jobs in the public office. Moon’s government in October pledged to create 174,000 jobs in the public sector by 2020. The number of new jobs increases to more than 800,000 if social workers and regularized employees are included.

Amid this somewhat unexpected political transition, the economic condition in 2017 was far better than what people had expected a year ago. Most analysts had expected economic growth last year to be no better than 2.7 percent. Some even anticipated a 2.4 percent growth. To the surprise of us all, the economic growth in 2017 is expected to be over 3 percent. Recently released statistics by the Bank of Korea showed that the 3rd quarter real GDP growth rate was 3.6 percent. As the growth rate of the first two quarters were 2.9 percent and 2.7 percent, respectively, a 3.6 percent growth rate was quite surprising. The prime reason for the 3rd quarter surprise was, as we all know, the 16.8 percent increase in equipment investment. It is not certain whether the semiconductor business boom in 2017 will continue on in 2018. Business analysts are divided about the future of the semiconductors business. But the boom in the IT industry made the transition of the Moon administration much smoother.

The Moon administration now steps into its second year with a number of challenges ahead. The IT industry boom of 2017 will be lackluster in 2018, and the labor market will plunge into a tug of war between laborers and executives. Very high minimum wages will create a lot of layoffs and possibly close down marginal businesses. The market interest rates will rise following the US rate hikes, and this will make private consumption and investment more difficult. The rapid appreciation of the Korean won since September 2017 will speed up imports while slowing exports, rendering trade surpluses to shrink in 2018. And the amendment negotiations of the KORUS free trade agreement in 2018 will be as contentious as its initial inception negotiation in 2012. Because of these challenges, almost all research institutes expect that this year will be less bright than 2017.

But there are still positive aspects. First, political uncertainty has been removed. Unlike in 2017, a new president and a new government are beginning to regain their leadership and authority to direct national policies. Second, political and economic friction with China after THAAD deployment seems to have settled down after President Moon’s visit to China in December 2017. Third, the budgetary environment looks fine. Tax revenues from January through October turned out to be KRW 22 trillion (USD 20.44 billion) more than the schedule planed before. As the national debt is well below 40 percent of the GDP, there will be little budgetary constraint for the government to implement active growth policies in 2018. Fourth, every senior government official correctly realizes that Korea must push for innovation-driven growth to sustain growth and create new jobs. It is true that innovation by venture entrepreneurs and creative businessmen should pave new ways of economic growth for the future of Korea’s economy. As it has been emphasized before, however, the innovation of already existing firms and businesses is as important as that of start-ups

Weighing all the challenges and positive aspects, the year 2018 may not be as bright as 2017 but almost equally worth endeavoring. The government should use national resources as efficiently as possible to achieve welfare and growth at the same time. It should try very hard not to waste tax money and must not teach but guide the private sectors, as long as innovation is concerned. Workers should learn how to coexist peacefully and harmoniously with businesses in a highly competitive environment world of very high wages. Government intervention in the labor market now being obsolete, laborers and business should find mutually beneficial ways of cooperation to survive fierce internal and external competition. Businesses should seek most innovative routes. Cooperation between the government, workers and business should be the new rule of the game. With the old government gone, it should not be replaced by the control of a different kind. Only efficient self-governance, innovation, and mutual cooperation should be the norm of this government. That’s what is expected about this gov- ernment and why it’s worth endeavoring.

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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