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To everyone’s surprise, a global institution revised the economic growth rate for Korea in a positive way from –1.2 percent to -0.8 percent for 2020. The Economic Survey of Korea which is released by the OECD every two years, put Korea at the top among 37 member countries on August 13, 2020, with –0.8 percent for the economic growth forecast. This was taken as a huge consolation especially to the government officials who have been struggling with unprecedented floods on top of half-year struggle with the COVID-19 pandemic. The favorable revision was highly received because Korea was almost the only upgraded country among the majority of forecasts that were being downgraded, and made Korea the highest in growth rates among 37 member countries. Although still in the negative territory, Korea’s -0.8 percent was higher in comparison with –7.3 percent of the U.S. or –6.0 percent of Japan.
Some might have naturally wondered why the OECD optimistically corrected the economic growth forecast this time. That is because of the changes in its forecasts of private consumption and fixed investment. Previously in June 2020, the OECD projected that private consumption would decline 4.1 percent and fixed investment fall by 0.7 percent for 2020. But this time, the OECD forecasted private consumption to fall only 3.6 percent and fixed investment to pick up 2.9 percent. The OECD report specifically points out that Korea’s prompt and effective containment strategies contributed to the limited spread of COVID-19, and that Korea was among the most successful countries in the world to contain the spread without complete lockdown. Also, it praised the Korean government in taking appropriate policy actions and measures to support economic hardship. Although COVID-19 has definitely beleaguered the Korean economy in consumption, investment and employment, the report says quick and effective measures by the government have sufficiently alleviated the negative consequences, making possible both a more shallow recession and mild unemployment. In other words, the better growth performance is not because of the private sector, but of the public sector. According to the Bank of Korea, the public sector contributed 1.9 percent point while the private sector contributed –2.7 percent point, rendering –0.8 percent in the economic growth rate for the first half of the year.
The OECD pointed out that the sound fiscal background has made the government respond effectively and quickly to support the deficiencies in private demand of consumption and investment. The national debt rate to GDP being only 40 percent, the government has plenty of room maneuvering a series of nine special emergency measures of USD 250 billion in its totality, including 3 special supplementary budgets of almost USD 60 billion. It should, however, be borne in mind that the OECD export growth forecasts were unlike others downgraded in the recent report significantly from –2.6 percent growth to –5.7 percent, coupled with current account surplus refreshed from 3.0 percent to 2.2 percent to GDP. This means that despite the relatively charming performance in 2020, there lies ahead a serious potential pitfall for exports. Trade being an indisputable engine of economic growth, authorities should take concern of withering exports and imports. The fiscal stimulus by the government can do the job of emergency care for a short while, but the Korean economy needs a fundamental overhaul in the trade sector to make economic recovery sustainable and long lasting. A high-level Korean authority has revealed a series of audacious projects called the Korean New Deal to sustain economic growth and create jobs, and the OECD seems to give a very high evaluation of it. The OECD points out that as a forerunner in digital technologies, the Korean government tries to create synergy with business sectors in data processing, green investments and inclusive growth. With the total budget of USD 100 billion until 2025, the government expects to create 1.9 million jobs, especially for the younger generation.
And yet, there seems to be little connection between the Korean New Deal and export propagation. All the specific measures of the Korean New Deal are geared only towards job creation and economic growth, with scarce reference to trade promotion. In that regards, the recent plan announced by the Ministry of Economy and Finance is quite illuminating as it contains a lot of projects to upgrade export potential in the six major service industries, namely contents, health and medical services, educational technologies, digital services, fintech and engineering. The players in these critical service industries have been asking the government to provide marketing support and financial assistance. Also, the industries demand tax incentives as well as information about international regulations and consumer tastes that are difficult to get by individual participants. With traditional manufacturing industries being in definite decline for export opportunity, next generation contenders are undoubtedly service industries armed with technology, data and software. As one of the indisputable major players in the field of IT, Korea is expected to perform superbly in the export of services, and there lies the sustainable future growth of the nation.
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