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(EDITORIAL from Korea Herald on Feb. 3)

All News 06:53 February 03, 2020

Alarming indicators
Shrinking manufacturing sector could further drag down Korea's growth potential

Data released last week attested to South Korea's sagging industrial activity -- particularly in the manufacturing sector, which makes up the backbone of its export-dependent economy.

The country saw its industrial output edge up 0.4 percent from a year earlier in 2019, marking the slowest gain since 2000, according to figures from Statistics Korea.

Manufacturing production capacity, which refers to the maximum amount of production by all manufacturers under normal operating conditions, shrank 1.2 percent on-year last year, recording the steepest decline since 1971, when compilation of related data began.

Moreover, the average factory operation rate was 72.9 percent in 2019, the lowest level since 1998, when the Asian foreign exchange crisis pushed it down to 67.6 percent.

The local manufacturing sector shed more than 80,000 jobs last year, most of which were the kind of well-paying positions that young job seekers prefer.

The weakening of local manufacturing industries is attributable to slumping exports and anti-corporate policies implemented by President Moon Jae-in's administration since it took office in 2017.

Outbound shipments from Asia's fourth-largest economy fell for the 14th consecutive month in January, according to separate data released Saturday by the Ministry of Trade, Industry and Energy.

In 2019, Korea's exports dropped 10.3 percent on-year amid a prolonged trade spat between the US and China and a delayed recovery in the global chip market.

Local manufacturing firms have been troubled with increasing regulatory restrictions and labor-friendly measures such as steep minimum wage hikes and a shortened workweek.

It is inevitable that many would choose to reduce investment at home and move production abroad.

Facility investment in the country decreased 7.6 percent on-year last year, the sharpest drop since 2009, when domestic facility investment shrank 9.6 percent in the wake of the global financial crisis. In contrast, outward direct investment by Korean manufacturers has been on a continuous rise, reaching a record high of $5.79 billion in the first quarter of 2019.

Turning a blind eye to these deteriorating indicators, the government has expressed optimism about the economic outlook for this year, citing on-month improvement in production and investment in December.

Finance Minister Hong Nam-ki, who doubles as deputy prime minister for economic affairs, said Friday that "signs of economic recovery have become clearer."

But it is hasty to paint a rosy picture of the economy.

The improved figures for December stem mainly from low base effects.

The rapid spread of a deadly new coronavirus that originated in the Chinese city of Wuhan last year is poised to have a consequential negative impact on the country's production and exports. The government's initial assessment seems to have underestimated its extensive scope.

The Moon administration is preoccupied with fiscal expansion as a means to bolster the economy, while adhering to its anti-corporate stance. It is now seeking to expand fiscal expenditure at a faster pace to finance populist projects ahead of April's general election, hoping to influence voter sentiment in favor of the ruling party.

But the government needs to make a fundamental policy shift if it is to revitalize the manufacturing sector.

In June last year, Moon declared a strategy for making Korea one of the world's top four manufacturing powers. He has since pledged to step up efforts to nurture new industries, accelerate deregulation and get manufacturers to move their overseas factories back home. But his pledge has been backed by no substantive action as conditions for corporate activity have turned from bad to worse.

Anti-corporate measures taken by the Moon administration led the country's manufacturing production capacity to mark the first on-year contraction of 0.2 percent in 2018. The key indicator of economic robustness went down further last year.

With the manufacturing sector continuing to slump, it will be difficult to achieve the government's growth target for this year, set at 2.4 percent.

The more fundamental worry is that the decrease in manufacturing output capacity will further drag down the country's growth potential, which has already weakened amid declines in productivity and the working-age population.

A recent report from the Organization for Economic Cooperation and Development estimated that Korea's potential growth rate, which refers to the maximum pace at which an economy can grow without triggering inflation, could slide from 2.7 percent in 2019 to 2.5 percent in 2020 and 2.4 percent in 2021.

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