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I t was a surprise when the Ministry of Economy and Finance (MOEF, hereafter) revealed a new revised economic forecast for 2021, where it raised the growth rate expectation from 3.2 percent to 4.2 percent. Although many domestic and international institutions recently have been upgrading their growth forecasts for 2021, no other institution was as bold as MOEF to increase it by a whole 1 percent point from the previous projection. As a result, the MOEF forecast of a 4.2 percent economic growth rate has marked the highest among major research institutions around, which mostly predicted around 4.0 percent for the year 2021.
MOEF’s confidence rests upon two fundamental premises; one is that exports have been doing excellently for the first half of the year, increasing almost 30 percent, and at this pace, this year’s exports will break the former record of USD 605 billion in 2018. The other is that MOEF expects a very strong private consumption growth this year. Indeed, it was the stagnant private consumption that dragged down the economic growth rate by almost 3 percentage points in 2020 when the former decreased by 5 percent. Now, MOEF is more than sure that private consumption will definitely pick up due to a series of massive government income support measures financed by the KRW 35 trillion second supplementary budget, on top of the re-invigorating export performance. MOEF is expecting private consumption to increase by 2.8 percent, and this is not a far cry from what other institutions are saying.
The crux of the matter, however, is that private consumption has not been the main driver of Korea’s economic growth at least for the last several decades. It has been declining five percent growth in the early 2020s to barely two percent growth in 2010s. Besides, private consumption is tremendously difficult to raise just one percentage point due to its massive size and the stickiness of human consumptive behavior. It was rather export and related investment activities that have lifted economic growth and job opportunities in Korea for the last two decades. It was indeed the nearly 7 percent growth in investment that has really prevented the growth rate from dipping further down below negative one percent.
Knowing both that consumption growth has been falling and very difficult to raise on the one hand, and that export related investment has been contributing to economic success for the last several decades, it becomes more evident where future development policy should go towards. Built upon the consensus that exports should be the main engine of economic growth and the source of new jobs, governmental efforts should be directed to, and be driven forward to, make a freer and more open economy for international trade. Korean people and businesses should be given more open opportunities, and at the same time, Korean markets should be more approachable to foreign businesses. Only through such path can Korea perpetuate a self-sustainable growth.
By Professor Se Don Shin
Professor Emeritus, Sookmyung Women’s University
The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA