"South Korea Losing Leadership... Urgent Need for Ruling and Opposition Parties' Consultative Body" [Issue Interview]

Hongki Kim, President of the Korean Economic Association (Professor of Economics at Hannam University) New Year Interview
"Korea Loses Dialogue and Negotiation Channels... Uncertainty Grows"
"Korea Fails Structural Reform Due to Lack of Strong Leadership and Partisan Logic"
"Priority Is Preparing for Trump’s Policies... Need for Ruling-Opposition-Government Consultative Body"

Since the emergency martial law situation, the South Korean economy stands on the brink. Not only has economic uncertainty increased ahead of the inauguration of the Trump administration this month, but repeated impeachment crises have dampened consumer sentiment and pushed the exchange rate through the ceiling. The economic command center has taken on the unprecedented 'acting authority of the acting authority' system, where one person bears all economic, political, and social responsibilities, creating a 'one person, four roles' situation. The execution of the arrest warrant for President Yoon Seok-yeol remains deadlocked, showing no signs of ending political instability.

There are significant concerns surrounding our economy this year. Major global investment banks (IBs) have lowered South Korea's economic growth forecast for this year from the mid-to-late 1% range to the early-to-mid 1% range, and even the Bank of Korea and the government have projected this year's economic growth rate at 1.9% and 1.8%, respectively, below the potential growth rate (2%). Following the martial law aftermath, foreigners have recently shown large-scale selling of government bonds, and IBs are revising upward their forecasts for the won-dollar exchange rate this year.

Kim Hong-gi, President of the Korean Economic Association, is being interviewed by Asia Economy at the Korean Economic Association office in Jongno-gu, Seoul. Photo by Heo Young-han

Kim Hong-gi, President of the Korean Economic Association (Professor of Economics at Hannam University), pointed out in a New Year interview with Asia Economy that the recent impeachment crisis is "simply adding insult to injury." He said, "I am deeply concerned that political uncertainty is increasing economic uncertainty, potentially leading to a vicious cycle," adding, "Foreign governments may also be more uncertain because they have lost channels for dialogue and negotiation with our country."

Meeting Professor Kim at the Korean Economic Association office in Gwanghwamun, Jongno-gu, Seoul, he criticized South Korea's failure to achieve structural reform due to the absence of strong leadership and factional logic. Professor Kim said, "In a situation where economic growth continues to decline, the solution to create a turning point lies in labor, education, and pension reforms," adding, "Reform requires concessions or sacrifices from vested interests and a social consensus system, where leadership plays a very important role. However, our country has now lost leadership."

He continued, "Our reforms were carried out under external pressure from the International Monetary Fund (IMF) after the foreign exchange crisis, but there has been almost no endogenous reform," and said, "In promoting various structural reforms, discussions should actively involve not only direct stakeholders but also social perspectives to accelerate structural reforms for the future."

Professor Kim pointed out that factional logic in politics is blocking reform. He criticized, "Currently, our country is caught in factional logic, reducing interest in reform and even discussions about reform are going along factional lines," adding, "It is difficult to make rational decisions when political gains and losses are considered."

He emphasized that it is most important for the ruling and opposition parties to unite and respond to prepare for uncertainties in the second Trump era. Professor Kim said, "The conflict between the ruling and opposition parties has become so great that important moments for structural reform seem to have been missed," adding, "The people have suffered amid such conflicts and have been swept up in factional logic." He further suggested, "The negative impact of the Trump era will be greater than expected, so it is most important to prepare beyond party lines, such as by creating a ruling-opposition-government consultative body."

He said innovation to raise productivity is important to increase South Korea's economic growth rate. He pointed out, "The reason South Korea's economic growth rate is falling is due to low productivity," noting that most of the country's small business owners and self-employed are engaged in low-productivity retail and food and accommodation industries. He criticized, "During COVID-19, the government's injection of subsidies and fiscal spending resulted in inflation, which caused polarization," adding, "Democracy requires public support, so all countries tend to turn to populism in difficult times, but there is no free lunch in our country or anywhere else."

The following is a Q&A with Professor Kim.

Kim Hong-gi, President of the Korean Economic Association, is being interviewed by Asia Economy at the Korean Economic Association office in Jongno-gu, Seoul. Photo by Heo Young-han

- On December 3, President Yoon Seok-yeol declared emergency martial law.

▲Our country is a representative nation that has succeeded in democratization and industrialization and is one of the seven advanced countries. Recently, the country's image has been enhanced by K-culture and K-food, such as the Nobel Literature Prize awarded to author Han Kang, but an incident occurred that could only be seen in underdeveloped countries. With former President Trump’s re-election expected to strengthen nationalism and protectionism, our country, which is heavily influenced by the global economy, must actively communicate and prepare detailed countermeasures for various scenarios. In short, this is 'adding insult to injury.' I am deeply concerned that political uncertainty will increase economic uncertainty, leading to a vicious cycle. Foreign governments will be confused about whom to talk and negotiate with in our country. The loss of dialogue and negotiation channels will further increase uncertainty.

- Compared to past impeachment crises (President Roh Moo-hyun in 2004, President Park Geun-hye in 2016), how severe is the current economic uncertainty?

▲The situation is much worse than then. In 2004, the Chinese economy was booming, and in 2016, the semiconductor market was rising, so external export conditions were favorable. However, now the entire world is experiencing downward pressure on exports due to protectionism, and domestic demand is very weak, resulting in significant economic uncertainty. Especially, Trump's specific policy actions are hard to predict, so the external environment is worse and uncertainty is greater than before. The competitiveness of our country's key industries is weakening, and it is time to find new growth engines. Given that the impeachment crisis occurred at a turning point for our economy, this situation is very different from the past.

- There are criticisms that politics is obstructing the economy.

▲The economy cannot be separate from politics. The economy is greatly influenced by politics. When political instability increases, it seriously affects the economy. This is especially true for our open economy in terms of trade and capital transactions. There should be political consensus to prepare and proceed with external economic issues at the national level. There will likely be little difference between the ruling and opposition parties in responding to Trump's re-election. At least, those responsible should prepare and negotiate with conviction, and a social joint declaration should be made in this regard.

- There are forecasts that our economy will record growth in the 1% range next year.

▲Even before the impeachment crisis, some institutions predicted our country's economic growth rate next year to be in the 1% range. Considering the domestic political situation due to impeachment, the economic growth rate may decline further in the short term. However, more importantly, our country's long-term economic growth rate has been continuously declining, and it is difficult to find momentum to reverse this trend. New momentum comes from 'strong leadership' based on stability. However, due to domestic political instability, it is difficult to prepare external response measures, which is very concerning.

In a situation where economic growth continues to fall, the solution to create a turning point lies in labor, education, and pension reforms. Reform requires concessions or sacrifices from vested interests and a social consensus system, where leadership plays a very important role. However, I think our country has lost leadership now. Without timely restructuring, greater costs will have to be paid. Due to low birth rates and aging, capital input is not happening, and total factor productivity is declining.

At the current trend, potential growth rate will approach zero percent in the 2030s. However, our country is caught in factional logic, reducing interest in reform, and discussions about reform are also going along factional lines. It is difficult to make rational decisions when considering gains and losses. Many people must have sighed watching the medical reform process. Our reforms were carried out under external pressure from the IMF after the foreign exchange crisis, but there has been almost no endogenous reform. In promoting various structural reforms, discussions should actively involve not only direct stakeholders but also social perspectives to accelerate structural reforms for the future.

- How should productivity be improved to raise economic growth?

▲Innovation is important to improve productivity. The reason South Korea's economic growth rate is falling is due to low productivity. The overwhelming majority of small business owners and self-employed in our country are engaged in low-productivity retail and food and accommodation industries. The government should help not by saying 'you are struggling, so we will help,' but by helping to increase productivity. It should scale up and induce movement toward high value-added industries while reducing unnecessary parts.

During COVID-19, disaster relief funds were widely distributed to self-employed and small business owners. Loan principal and interest repayments were also extended, reducing delinquency rates. These factors slowed restructuring. Donald Trump's election in the recent U.S. presidential election was partly because the U.S. economy received significant policy support during COVID-19. Vulnerable groups struggled despite receiving much support during COVID-19. Fiscal spending resulted in inflation, causing polarization. This is very ironic. There is no 'free lunch' in the world. Although COVID-19 relief funds were intended to help vulnerable groups, the problems they cause must be recognized and the intensity adjusted. However, democracy requires public support, so all countries tend to turn to populism in difficult times. There is no free lunch in our country or anywhere else.

- Can the emergence of robots and artificial intelligence (AI) increase productivity?

▲They cannot alleviate the seriousness of reduced labor input, but if investments and adjustments are made, it is possible. Especially, ways to increase productivity in small and medium-sized enterprises (SMEs) should be considered. SMEs account for a larger proportion in our country than in any other country worldwide. They make up over 99% of businesses and about 80% of employment. Increasing productivity in these sectors will raise growth rates and partially resolve polarization issues. The government should guide not by saying 'you are struggling, so we will help,' but by focusing on 'how to increase productivity.'

- Our key industries are being caught up by China.

▲Efforts are needed to secure technological capabilities in so-called semiconductor and bio industries. This requires enormous investment. Over the past two years, companies and the government should have supported this. In the past, investments were made in semiconductors and batteries, but China quickly caught up. Some argue that the U.S.-China tariff war buys time, but retaliatory tariffs between the U.S. and China are economically harmful to both sides. In this situation, the tariff war is not only a problem for the two countries but also for our country.

- Do you think immigration policy can alleviate low birth rates and aging?

▲From an economic perspective, immigration would be desirable. As the population declines, it would help if good talent comes from abroad. If excellent foreigners are used without paying the cost of their education, it is good in terms of externalities. There may be economic problems, but there are clearly many positive aspects. Immigration is more than a simple economic issue; it is a social and political issue. Social consensus must be reached. Economically, the benefits are significant, and ultimately, immigration will be promoted. However, social and political conflicts must be changed, adapted to, and accepted by us.

- Recently, the exchange rate soared to the 1,480 won level.

▲The exchange rate rose as capital outflow risk increased due to South Korea's interest rates being lower than U.S. rates. Also, uncertainty increased with Trump's re-election, leading to a flight to safe assets and a rise in the dollar's value (exchange rate increase). Suddenly, domestic political factors further increased uncertainty, causing a sharp rise in the exchange rate. If domestic political instability intensifies and prolongs, the exchange rate is likely to rise further. However, since the exchange rate is already sufficiently or excessively high, I do not think it will continue to rise steadily. Our country's external assets and foreign exchange reserves are at a considerable level, so I do not think the exchange rate will skyrocket as it did in the late 1990s. However, this assumption is based on political instability easing and stability being restored.

- Can the Bank of Korea lower the base interest rate in a high exchange rate phase?

▲The Bank of Korea decides the base interest rate considering price and financial stability. Price stability seems to have been achieved to some extent. Going forward, the exchange rate is likely to be an important factor in the Bank of Korea's rate decisions. Currently, the interest rate differential between Korea and the U.S. is 1.5 percentage points, and exchange rate volatility (possibility of exchange rate increase) is rising. If political uncertainty in our country eases, the Bank of Korea would have no burden in lowering rates, but if the exchange rate soars and remains high, it will be difficult to lower rates further. However, if the U.S. lowers rates further and the exchange rate stabilizes, the possibility of the Bank of Korea lowering rates will increase.

- How do you evaluate the economic policies of the Yoon Seok-yeol administration?

▲What was intended for the people was not well implemented, and I do not clearly remember what efforts were made. Medical reform was not properly carried out. Leadership is about coordinating and gathering opinions. I think there was a lack of preparation for execution. While a private-sector-led economy is a good idea in some respects, various stakeholders' opinions must be gathered and promoted to do this well. I think there was a lack of effort to coordinate and reach consensus.

- What kind of leadership is needed for the new government?

▲The conflict between the ruling and opposition parties has become so great that important moments for structural reform seem to have been missed. The people have suffered amid such conflicts and have been swept up in factional logic. Various rhetoric can be used for economic growth, but the method (how) is important. It is difficult to say what leadership is needed in the next political situation amid the current crisis. However, how to prepare for the uncertainties of the Trump era must be seriously considered. The negative impact will be greater than expected. It is most important to prepare beyond party lines, such as by creating a ruling-opposition-government consultative body. Even before the impeachment, the most serious issue for our country was how to respond amid the uncertainties of the Trump era. I am most concerned that this part may be disrupted.