Published : 2013-01-30 20:24
Updated : 2013-01-30 20:24
During outgoing President Lee Myung-bak’s five-year term, which ends late next month, the economy grew at an average annual rate of 2.9 percent. The figure, far below the country’s potential growth rate estimated at 3.7 percent, is lower than that marked by any previous administration.
Such poor performance should be all the more embarrassing for Lee, as the former construction company CEO won the 2007 presidential election on the platform of reinvigorating the economy. To be fair to him, the prolonged world economic downturn might be held mainly accountable for the sluggish growth. Lee can be credited for being effective in shielding Korea’s economy against the global financial crisis that began shortly before he took office.
Nevertheless, it still sounds somewhat reasonable for critics to argue that his administration’s policy of putting a priority on supporting large manufacturing companies has led to deepening the furrow of the economic slowdown.
From this viewpoint, it can be said that the transition committee formed by President-elect Park Geun-hye is taking the right direction by working on measures to help strengthen the service sector and small businesses, and thus redress the structural imbalances in the economy. At the same time, Park and her economic staff should keep in mind that the success of their approach will eventually depend on whether it results in expanding the long-term growth potential.
The Bank of Korea recently announced that the economy grew by 2 percent last year, the slowest gain in three years. Early this month, the central bank revised down its growth outlook for this year from 3.2 percent projected in October to 2.8 percent. The sluggish growth would make it difficult for the incoming administration to secure enough tax revenues to fund the generous welfare programs pledged by Park during her campaign for the Dec. 19 presidential vote.
It may be the time for an epiphany that the country has reached its limit in propelling growth on the back of manufacturing giants and is in an increasingly urgent need to boost the service sector. The brewing global currency war, which raises concerns over the weakening competitiveness and profitability of Korea’s export-dependent manufacturers, should serve as an occasion for prompting changes in its industrial structure and system, which is tilted too far in favor of manufacturing.
According to an international comparison, the manufacturing sector accounted for 39.2 percent of the country’s gross domestic product in 2011, far above 18.7 percent for France, 19.2 percent for the U.S., 21.5 percent for Britain, 27.3 percent for Japan and 28.6 percent for Germany.
As noted by many analysts, the heavy proportion of the manufacturing industry, whose contribution to creating jobs and value added has been marginalized, is holding back the economy from advancement. To ensure sustainable growth, measures need to be taken to boost service sectors, including medical care, education, tourism, distribution and telecommunications.
The focus of policy should be put on facilitating competition through deregulation rather than strengthening protection through regulation. It would be effective and efficient to concentrate support on improving the productivity of service industries by helping nurture competent manpower and setting up institutional foundations that enable and prompt continuous renovation.
The service sector should be eventually armed with global competitiveness to achieve the same export potential as manufactured goods. The country had recorded annual services account deficits ranging from $5.8 billion to $13.3 billion for more than a decade until last year when it had a surplus of $2.6 billion. The local market with a population of 50 million cannot be so large as to offer a sufficient number of decent jobs and avoid the possibility of overheated competition.
In the immediate term, a strategy is needed to enable local service industries to benefit from China’s rapidly increasing domestic consumption.
Beyond opportunities in China, global trade in services ― currently worth $8 trillion ― is expected to rise when an international services agreement is concluded, possibly in a couple of years. Multilateral talks involving Korea, the U.S., the EU and 18 other nations are set to kick off in Geneva, Switzerland, in April to work out the accord.
The signing of the pact on lowering barriers to trade and investment in the service sector would lead to some pains for Korea especially in the fields of intellectual property and business services. But it may also serve to enhance the competitiveness of the country’s service industries and bring about more opportunities for advancing into foreign markets, which are difficult to penetrate through bilateral negotiations.