Government Policies That Undermine Market Economy Principles Cannot Succeed in the Medium to Long Term

U.S.-China trade conflict and Korea-Japan tensions slow the economy ... concerns grow that next year’s economic growth rate may fall below 2%

Companies must upgrade their production structure in line with changes in the global supply chain

The domestic and external environment surrounding our economy is far from favorable. Externally, the shadow of a global economic slowdown is looming. In particular, the spread of protectionism caused by the U.S.-China trade war and the difficulties in exports stemming from Korea-Japan tensions are becoming a reality. Recently, the decline in our exports has been the steepest among major exporting countries. Exports in October also came to $46.8 billion, down 14.7% from the same period last year.

Domestically as well, the government’s rapid market intervention, including minimum wage hikes and shorter working hours, is affecting weak domestic demand along with sluggish exports. At this rate, our economic growth rate at year-end could even come in below 2%.

The trade war between the U.S. and China is unlikely to find a solution anytime soon. Because Chinese products face difficulties in being exported to the U.S., the structure of our economy leaves little choice but for the export volume of our firms shipping intermediate goods to China to decline. Korea-Japan tensions are also acting as a negative factor in export markets. Even if the issue is resolved politically in the future, it will not be easy to win back consumers once they have turned away.

That said, from our standpoint, we cannot simply keep blaming others. As the Fourth Industrial Revolution unfolds and spreads, the global supply chain is becoming even more divided and specialized. These changes in the external environment demand mid- to long-term change and innovation from both our government and companies, which depend heavily on trade.

According to the recent national competitiveness assessment of 141 countries released by the World Economic Forum (WEF), Korea ranked 13th overall, up two places from the previous year. It ranked 1st in macroeconomic stability and ICT adoption.

However, the competitive structure of the product market (59th) and labor market rigidity (51st) were revealed to be very weak. Corporate dynamism also fell from 22nd to 25th from the previous year. The rise in our national competitiveness ranking is certainly welcome news.

Yet it is far more important for the government to improve the overall conditions that allow economic actors such as households and firms to engage freely in economic activity, rather than making artificial efforts through market intervention. No matter how plausible the justification may sound, government policies that undermine the principles of the market economy cannot succeed in the mid to long term. In recent years, the export competitiveness of Korean firms has weakened due to competition from emerging economies such as China and checks from advanced countries that possess original technologies.

The production structure of our leading export firms is generally based on semi-processed trade or high-volume, low-margin sales, which limits investment efficiency and value creation. To address this, production structures need to be upgraded in line with changes in the global supply chain.

Specifically, considering overall factors such as corporate productivity, employment costs, and technological levels, there is a need to upgrade toward a structure that produces goods with strong linkages among products. Fundamentally, what is needed is an environment in which the corporate ecosystem can evolve and develop in a healthy and innovative way. The cycle of business start-ups, growth, restructuring, exit, and re-start should function smoothly. As specialized firms evolve and grow through free economic activity and networks, the emergence of more advanced products will become possible.

The oceans are home to organisms that possess more DNA than humans. They have undergone extinction, survival, and evolution over billions of years. Just as only organisms that replicated DNA quickly and efficiently survived, the same applies to the corporate ecosystem. That is why regulations and institutions that hinder the growth of innovative firms should be improved.

Youngshin Kim

Professor of International Trade, Keimyung University

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Original title: '시장경제원리 훼손' 정부 정책, 중장기적으로 성공 못해

Author: Young-shin Kim

Date: 2019-11-29

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=23&idx=22103