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A multifarious economic storms is expected to challenge the Korean economy in 2023. A record level inflation, abnormally high interest rates, extremely volatile exchange rate movements and massive loss in the value of stocks and real estates amid global recession all at once inflict enormous economic and social burden on the people’s shoulder, who have already been beleaguered by three years of COVID-19. The inflation rate of 5% is highest in more than 20 years, and 8% lending interest rate is also highest since 2011. The dollar exchange rate around 1400 won per dollar is also the highest since 1500 won in February, 2009. On top of these contemporaneous macro insurgencies, there are global recession and unprecedented losses in the value of both financial and real assets, which seem unsurmountable for many of the already debt-ridden middle classes.
With this seemingly formidable back drop, it is hardly surprising many of the leading research institutions in Korea suggest less than 2% growth rate for 2023. The Bank of Korea put out a growth projection of 1.7% for 2023 last November, while the Korea Development Institution last October hinted at 1.8% growth. Though a 1% growth rate hardly seem miserable as long as it purports a positive growth, it should be reminded that those forecasting institutions have never projected for the last 40 years a growth rate lower than 2%. Always, they had prophesized 2% or higher economic growth rates, only to the only exception in year 2023 with a good reason. For the last 6 decades, there were on 4 cases when growth rate fell below 2%. -5.1% in 1997, -1.6% in the oil shock of 1980, -0.7% in 2020 after COVID-19, and 0.8% in the financial crisis of 2008.
What the economists and policy makers are mostly concerned about is that about the 23 million middle and lower income classes should face most of the economic shocks with loss of incomes and jobs, reduced working hours, cut in sales and revenues due to slowing economy. Jobs being insecure, their businesses being unanchored, they have little to maintain day by day survival without enough savings to overcome. The welfare programs of the government, although it has been substantially replenished and constantly renovated, are far from being sufficient for the relatively poor people to comfortably rely upon.
The new government is well aware of the economic danger for 2023. The ministries have set out a number of pertinent programs and policies to deal with such potential problems of the afflicted middle class and SMEs. First, the government has tried to supplement the sudden decline in household consumption by providing emergency aid to the lowest income group. Rather than giving direct cash compensations, the new government intends to supply more coupons for the broader ranges of families in need. This is why the government plans to spend 226.6 trillion won for the welfare budget for 2023, a 4.4% increase over the last year. Considering the extent of the sluggish 1% economic growth, the government might have to expand its budget substantially next year through an emergency budget. Also, the government should be ready to provide fast and expedient help to the 6 million self-employed and SMEs as they face slowing business and increasing burdens of rent and utilities, interest payments and higher labor costs.
Third, the government is eager to lower the corporate income tax rate for the leading companies from 25% to 22%, which is designed to encourage their investment and employment as well as to induce foreign investment into Korea. Although it is well known that the Korean corporate income tax rate is relatively higher than other competing countries such as Taiwan and most of the OECD countries, the parliament dominated by the opposition party has been vehemently opposing the government proposal, stalling the entire 2023 budget plan for 2023. The government budget plan has been hung in the congress floor well beyond the legal deadline of December 2, 2022, but somehow it will eventually come up with a compromise.
The only remaining challenge might be to maintain fiscal austerity, which has been seriously endangered by spending by the previous government, rendering the national debt surge from 34% in 2016 to a level of almost 50% by the end of 2022. It must be difficult for government behavior to turnaround overnight from extravagant spending to unprecedented frugality, especially when next general election looming very close in 2024, but President Yoon and all the ministries seem to be dedicated not to follow the populist footsteps of the previous governments, but to set the national budgetary course on a right and sound track.
Weighing all the apparently unsurmountable economic turmoil, financial obstacles and political challenges, however, it should be remembered that Korea has countered even worse crises back in 1998 and 2008. It was the wholesome corporate ingenuity and people’s endurance that led to miraculous economic revival back then. This time, on the eve of another potentially devastating economic storm of 2023, the Korean people and the government stand ready to navigate successfully through the turmoil, never succumbing to failure.
With such challenges, every government has to find solutions of its own. The US and the Biden administration ventured out last August, 2022, with the audacious Inflation Reduction Act of 2022. The act wants to stimulate the economy by spending USD 370 billion on the measures to use more efficient energy sources for cars, houses, commercial buildings, and public transportation. In short, the IRA of the Biden administration aims at the dual task of anchoring the National Energy Security and of achieving higher economic growth at once. The key words for the Biden administration seems to be adaptation to climate change, usurpation of information technology supremacy, and maintaining global scientific dominance..
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