Invest KOREA

A lthough it is seen as just one of many metropolitan cities in Korea, Changwon is exceptionally important not just for Gyeongnam Province but for the entire nation, because it has long carried a very special meaning for the Korean economy.

In 2018, Changwon's regional GDP (RGDP) was about 37 percent, with exports making up 47 percent of the entire Gyeongnam Province. But what makes Changwon so special is not only the sheer size of its economy but its industrial structure and composure. Changwon's industrial structure is heavily concentrated with manufacturing, taking up 53 percent of RGDP. Almost all of Changwon's exports are various industrial machines and equipment.

For Korea, Changwon means manufacturing, and the national manufacturing industry means Changwon. This is why Changwon is dubbed the manufacturing capital of Korea. Ever since the inception of the Changwon National Industrial Complex in 1974, which is one of the biggest among 38 of such complexes, Changwon was strategically designed to be the epicenter of Korea's industrial machinery industry, and has been working quite remarkably. Changwon played a crucial role in Korea's economic development by supplying cutting-edge industrial machines and equipment on the one hand, and by earning enormous revenues from its exports of machinery, equipment and automobiles on the other hand.

Since then, Changwon's exports have become increasingly lackluster. Of course, local as well as central government officials are highly concerned about this, trying to find quick and efficient solutions. It seems as though the entire vigor of Korea's economic vitality rests on whether Changwon is able to find the panacea for the current economic situation.

Before finding a cure, the real causes have to be identified. First of all, the exchange rate of the Korean won has been so strong against the main competitor currency, namely the Japanese yen. From 2013 to 2018, the nominal effective exchange rate of the yen depreciated 6.3 percent (from 87.8 to 82.3) while that of the won appreciated 8.8 percent (from 107.0 to 116.4), making the won appreciate 15.1 percent against the yen, according to statistics by the Bank for International Settlements (BIS). This exchange rate movement of the Korean currency against one of its most fierce export competitors, namely the yen, has made Korean exports face difficulty in other areas. Understanding that the correction of the exchange rate policy by any nation has been under tight scrutiny by U.S. authorities as well as international organizations such as the International Monetary Fund (IMF), the appreciation of the won is not expected to be corrected in the foreseeable future.

The other important cause of the trouble seems to be related with low labor productivity. Both the Organization for Economic Co-operation and Development (OECD) and IMF are unequivocally pinpointing the sub-par labor productivity as the prime challenge for the future. To improve labor productivity, the solution should follow the triple track consisting of human training; the replacement of antiquated factories with high-tech facilities and equipment; and finally, cooperation with advanced corporations abroad. Without providing constant supply of highly skilled and trained labor forces, it is impossible to achieve and sustain high level productivity. Therefore, all of the education and training institutions and facilities in Changwon have to overhauled and recharged to fit the needs in creating an upgraded Changwon. Of course, the national government has to allot a substantial size of its budget, maybe up to trillions of won, for that purpose. Also, the government has to take audacious actions in replacing old and rugged machines and plants to dramatically enhance labor productivity. Labor productivity can hardly be raised without machines based on cutting-edge technology. Labor productivity goes hand-in-hand with technology embedded capital. This will probably will require trillions of won, but should not be 100 percent borne by the government. Either financial institutions or crowd funding could take up a substantial portion and share the burden.

While the aforementioned two tracks of requires a significant amount of financial resources, the last track necessitates not tangible funds, but intangible trust. This means the freedom to do business, trust among businessmen, as well as reliability and consistency of the bureaucrats, and all of this could be spelled out in one word: deregulation. In fact, a deregulatory environment is more important and more difficult to obtain than financial resources. Everybody dearly hopes Changwon can grow to become the mecca of the Korean economy once more through deregulation.

By Professor Se Don Shin
Dean, Sookmyung Women’s University
seshin@sm.ac.kr

The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA