Falling exports and sluggish domestic demand against the background of a global economic slowdown – the Korean economy is not the perfect picture of health. Now, less than two months into his tenure as South Korea’s new finance minister, Okyu Kwon finds himself tasked with trying to breathe some life back into the forecast.
In a wide-ranging interview at his office in the Gwacheon government complex in Seoul, Kwon dwells on the problems the government faces in trying to boost productivity and social spending at the same time. He also outlines his ideas about how Seoul should handle the economic aspects of eventual unification with the North.
The career bureaucrat took up the job of finance minister and deputy prime minister in July, after returning from Paris where he had served as South Korea’s ambassador to the OECD. (He was appointed chief secretary for national policy to president Roh Moo Hyun for a few months before gaining the number two position in government.)
Kwon, who graduated in economics from Seoul National University and the University of Minnesota, is blunt in his analysis of Korea’s economic challenge: “We do not have enough resources in terms of the factors of production,” he says. “The only one we have is manpower. Based on that, we have been very successful, and I think that will continue in the future. But increasing the capacity of our manpower will be [critical to] our success in the future.” The OECD has estimated Korea’s labour productivity at only 40% of that in the US.
“There are a lot of weaknesses” in the economy, Kwon admits frankly. “We still cannot find very good ways to resolve social conflicts – harmonization between social objectives and economic activities, including labour problems. We still do not have enough of a social safety net, so our social system is not fully operating yet. Therefore, the main goal of economic policy at present is to pursue both objectives together [increased productivity and building a social safety net].”
New vision
Kwon says that President Roh’s “participatory government” will announce a long-term policy exercise aimed at achieving these objectives. “We call it Vision 2030. We will check the environment in the future – domestically and globally – and see what strategies we can adopt. It is a sort of policy exercise by making government and private-sector people join in the discussion and make them prepare for future changes in the environment.”
There is a sense of urgency in all this, says Kwon. “Our growth status is still far behind that of advanced countries. Per capita GDP is less than $10,000 whereas for the advanced countries it is almost $50,000. So we need to increase our productivity and our growth potential. At the same time, our social expenditure is too low. Among OECD countries, at the bottom of the advanced countries are Japan and US. But compared to those two countries, Korea still is far behind.
“In the case of Japan it [welfare spending] as a share of GDP was about 17% in 2004 and in the US about 14.6%. In our case, it was 7.6% in 2004 and in 2005 only 8.4%. We have drawn the conclusion that within 15 years we should reach at least Japan and the US level of social spending. Because of the financial crisis in 1997, we introduced some safety net measures all at once [while] other countries introduced them over 50 years.
Therefore social expenditure increased rapidly.” Even so, it should not be necessary to raise tax revenues at least until 2011 to finance new expenditures, the minister says.
Inflation fears
Is inflation still a threat to Korea? “A country like Korea which imports 96% of its energy resources must be watchful,” he replies. “We have managed inflation successfully up to now. This year we allowed utilities to adjust their prices, and we expect inflation will be around 2.8%. Core inflation, which excludes energy and agricultural prices, will be about 1%. If we can explain to the public that the somewhat high inflation comes from factors beyond our control, we can successfully contain the inflationary mindset.
“The Bank of Korea is very much concerned about headline inflation, and therefore they are going to change their inflation target number from core inflation to headline inflation, from next year. This means that the Bank of Korea will have a strong intention to contain inflation.” Wage pressures are not strong despite Korea’s reputation for labour militancy, says Kwon. “Even though a very strong labour movement continues, the total number of conflicts is decreasing. The total loss of working days is also decreasing, and production disruption numbers are declining.”
Kwon also claims in his conversation with Emerging Markets that South Korea’s financial system has become “very balanced” in the wake of the 1997 financial crisis. “All the important ratios, such as return on equity and return on assets are very high, and the bad loan ratio in the financial system is decreasing to a very small number.”
Overall, the domestic banking sector has become “very sound”, he says. He acknowledges the more recent crisis concerning consumer finance companies but claims that, while the total number of delinquent borrowers was about four million when the crisis was at its peak (at the end of 2004), numbers have since returned to “normal levels”.
North Korea factor
How much does the government take into account the “North Korea factor” – and the possibility of eventual unification between North and South when making its plans for the future?
“In terms of unification, no one knows what will happen in the future,” Kwon says, “but if we look back at the case of Germany when they unified in 1991, the West German situation and the East German situation were much better than the current South Korea and North Korea situation.” The West German economy was much more advanced than South Korea, and East Germany was also very much more advanced vis a vis North Korea’s current situation. But after the unification of Germany, they have suffered for 15 years, and now only this year have they shown some small sign of recovery. The German case we call a ‘reflection case’ or lesson. This means we do not follow that model. They showed great failure during their process of unification.
“For example, the currency unity was a total failure. All of a sudden they imposed capitalistic and legal systems on the East German economic system, and their way of privatizing was also another failure. We should not and cannot follow that model.” He adds with a laugh, “We cannot afford to do that.” Other models should be followed, Kwon suggests. “I believe that the successful case of eastern European countries should be the model for the change of economic system in North Korea.”
He singles out the Czech Republic’s model of economic reconstruction – from socialist “command” economy to nearer a market economy – for special praise. “Czech President Klaus visited Seoul in 1993, and he met the then deputy prime minister,” Kwon recalls. “What he said at that time was very impressive. So when I was in Paris at the OECD, I studied the Czech Republic’s story.” He later visited Prague to learn more, and he says that “sequencing of reforms is very important.” He reported back to President Roh on the Czech transformation experience, and the president was so impressed that he made Kwon finance minister, an aide said.