[Opinion] Turning Point of the Korean Economy Must Be Addressed Through Industrial Policy

Professor Kim Sang-bong, Department of Economics, Hansung University

The global economy has entered a new phase after COVID-19. Although the economy was poor in the first year immediately following the COVID-19 crisis, last year’s global economic growth rate was not bad.

This was due to the base effect of the previous year's sluggish growth rate and the adaptation to the COVID-19 situation. Instead, the issue of high inflation caused by supply or supply chain problems emerged. This year, growth is slowing amid persistent high inflation, raising concerns about stagflation worldwide. South Korea is no exception. Without medium- to long-term defenses against inflation or measures to boost growth rates, stagflation could occur.

In this global turning point situation, what should our economy rely on to find a breakthrough? First, it is necessary to stabilize prices as quickly as possible. The surge in real estate asset values must be normalized first. A rapid increase in real estate values exceeding the normal growth rate in the short term can raise prices by polarizing demand through the wealth effect.

However, controlling demand for goods or services is not appropriate in the modern era. Assuming demand is constant, adjustments to supply or supply chains are needed instead. Supply chains are global, and it would be fortunate if we could resolve some supply chain issues. Although solving short-term inflation problems is difficult, in the medium term, supply chains should be diversified to meet demand. Industries or sectors dependent on imports are representative examples.

Then, we need to understand in which aspects or industries our goods or services are in short supply. Regarding supply, it is necessary to know the supply and demand situation down to the detailed classification levels of industry codes: major category, middle category, subcategory, and detailed subcategory. We need to know the domestic demand ratio, import ratio, sales, production volume, technical workforce, and technological level. A representative sector is agriculture, forestry, and fisheries. Inflation rates in agriculture, forestry, and fisheries have been prominent since last year. Some agricultural products have risen by hundreds of percent, often due to a shortage of production labor. Farmers are not pleased with sudden increases in agricultural product prices either, as in most cases, the prices at production sites remain the same while consumer prices have risen. It is necessary to introduce technologies linked to the Fourth Industrial Revolution in the medium term or examine distribution networks where production labor is lacking.

Is industrial policy applied only to inflation? The same applies to all areas related to economic growth rates. To achieve proper economic growth, it is necessary to understand production by industry, consumption of intermediate goods, import ratios, technological levels, sales, workforce numbers, number of companies, technical workforce, and technological capabilities down to detailed classifications, and analyze inter-industry ripple effects. Additionally, it is essential to determine how much of the Fourth Industrial Revolution should be incorporated to grow the economy and understand how not only employment changes but also other variables mentioned earlier will change. This will enable preparations such as unemployment benefits by industry during crises like COVID-19 and prevent situations like the mask shortage.

Currently, the Korean economy stands at a turning point. It is a turning point between long-term stagnation or stagflation and overcoming the crisis to rise again. Now is the time to understand this turning point and pursue proper development again. The starting point of all development can be said to begin with industrial policy.

Professor Kim Sangbong, Department of Economics, Hansung University