The South Korean government has unveiled a strategic economic program targeting the country’s pressing challenges, including inflation, declining exports and weakened consumer demand.
The program encompasses a range of measures from export promotion and research and development (R&D) enhancement to facility expansion and subsidies in energy and agriculture. However, critics point out that it fails to address the concentration of economic power among large conglomerates and does not adequately tackle growing income inequality.
NEED FOR REALIGNMENT
The economic stimulus program emerged in response to the prolonged deceleration in South Korea’s economic growth, which has seen a decline from an average of 4.1% in the 2000s to just over 3% in the 2010s. South Korea’s GDP growth registered at 1.4% last year and is projected to grow by 2.1% this year.
This deceleration has sparked concerns among experts about the potential erosion of the country’s developmental momentum.
Global consulting firm McKinsey has offered a stark assessment, labeling the South Korean economy as stagnating. The firm attributes this stagnation to deteriorating labor and capital conditions and decreased industrial competitiveness.
To address these issues, McKinsey advises the country to move away from the dominance of large, vertically integrated industrial groups. The firm suggests a shift toward industries that produce high-value-added products and services, particularly those leveraging new information technology (IT) and artificial intelligence (AI) technologies.
It also emphasizes the importance of fostering a culture of innovation, advocating for cross-sectoral collaboration and the free flow of capital across different sectors.
According to McKinsey, this alignment is not just about immediate recovery but is crucial for securing a sustainable economic model that can support South Korea’s growth ambitions through 2040 and beyond.
Samsung’s office in Milan, Italy, June 13, 2021 | Image: Babak Habibi via Unsplash
OLD HABITS DIE HARD
The government’s economic support measures aim to revitalize various sectors of the economy. These measures include export promotion, stimulation of domestic demand, fiscal discipline and additional financing for emerging industries. The approach also encompasses support for large and small businesses and strategies to curb inflation.
However, a closer examination reveals that the program primarily favors large businesses. This focus is rooted in the structure of the Korean economy, where industrial conglomerates and chaebols predominantly drive exports, facility investments and major R&D initiatives.
The policy framework includes targeted tax credits and deductions, further solidifying the position of large corporations, particularly those investing in advanced industries, mirroring past industrial policies and drawing parallels with initiatives like the Heavy and Chemical Industry (HCI) Drive of the 1970s.
While the current economic package may not be as extensive, it nevertheless reinforces South Korea’s traditional industrial policy to respond to similar movements in the U.S. and the EU, such as the Inflation Reduction Act, the Net Zero Industry Act and the Critical Raw Materials Act.
South Korea’s active industrial policy will likely optimize limited financial resources, reduce bureaucratic hurdles and achieve economies of scale. This approach is particularly pertinent for Korea, given its relatively small domestic market. Consequently, sectors like industrial construction, new materials, IT and AI are poised for growth.
Government financing and tax incentives will also be instrumental in stimulating the investment cycle. An invigorated investment climate will fuel demand for construction and generate employment opportunities. Ideally, this should lead to an uptick in consumption.
However, consumption dynamics are complex and influenced by other factors, such as overall social sentiment.
A potential downside of this government intervention is the exacerbation of wealth concentration among the already affluent, which could have significant implications for long-term consumption patterns.
Moreover, the government’s industrial policy could inadvertently hinder market competition by obstructing the entry of more efficient players. As highlighted in the McKinsey report, the current lack of a free flow of innovation and capital in South Korea is a concern, potentially undermining the nation’s long-term growth prospects.
An illustration of a bustling port | Image: Korea Pro
GLOBAL IMPACT
South Korea’s economic package reflects a broader shift in global economic policy, where nations are increasingly adopting assertive industrial strategies and protective measures.
South Korea’s approach might have faced challenges under the World Trade Organization’s (WTO) dispute settlement mechanisms. However, with major economies like the U.S. and the EU prioritizing domestic support for their industries, the ROK’s strategy aligns with a global trend, raising critical questions about the future role and relevance of the WTO.
Given South Korea’s influential role in advanced industries, its economic strategy will likely resonate globally. If a traditionally trade-open country like South Korea intensifies its use of economic stimuli, it may signal other nations that adopting similar strategies is an acceptable, or even necessary, response to global economic pressures.
South Korea’s influence is particularly notable in its advisory role to developing nations through international organizations, setting precedents that other regional governments may follow.
However, the focus of Korea’s economic package raises concerns about its domestic and global consequences. The program’s intent to bolster competitive industrial sectors is overshadowed by its disproportionate benefits to large businesses. This skew could solidify the dominance of big businesses in innovative industries, potentially sidelining smaller, innovative enterprises and exacerbating income inequality.
The broader social implications could include reduced economic opportunities for those outside the established corporate networks and a further deepening of income disparities. While the precise outcomes of this policy direction remain uncertain, the trajectory suggests a continuation of patterns favoring established economic powers at the expense of broader, inclusive growth.
The South Korean government has unveiled a strategic economic program targeting the country’s pressing challenges, including inflation, declining exports and weakened consumer demand.
The program encompasses a range of measures from export promotion and research and development (R&D) enhancement to facility expansion and subsidies in energy and agriculture. However, critics point out that it fails to address the concentration of economic power among large conglomerates and does not adequately tackle growing income inequality.
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Irina Korgun holds a Ph.D. and is currently a visiting scholar at the Hankuk University of Foreign Studies' EU center in Seoul. Her visit is sponsored by the Korea Foundation fellowship program. Her expertise lies in trade and economic development within Korea.