hankyoreh

By Park Soon-bin, senior staff writer

Corporate investment still hasn’t bounced back from the level recorded during the economic crisis that started in 2008. Sluggish investment has moved beyond the point of slowing the economic recovery and is currently regarded as one of the main factors lowering the growth potential of the Korean economy. If the slump in investment continues, it may gradually erode the underlying vitality of the economy, becoming a much more serious problem.

According to the Bank of Korea (BOK)’s business survey index (BSI), released on Dec. 6, the index for equipment investment by manufacturers in November 2012 was down two points from the previous month to 89. This figure is the lowest in the three and a half years since April 2009 (88), when the US-led global financial crisis was taking a severe toll.

When this index dips below the baseline of 100, it means that more corporations say they have decreased their planned investment than have increased it. During 2012, the investment figures have never exceeded 100, and since August they have continued to drop. Adjusted for the size of the corporation, the November index for chaebol was 87, which is lower than the average.

The slump in investments can also be seen in GDP figures compiled by the BOK. The rate of increase in gross fixed capital formation (which includes not only equipment investment but also construction investment and intangible asset investment) compared to the same period last year was 4.0% in Q1 of 2012, but has continued to fall since then, from -1.6% in Q2 to -2.3% in Q3.

The Business World Goes Back on Its Word

These poor investment figures are strikingly different from the initial promises made by business figures. In February 2012, the Federation of Korean Industries (FKI) announced an aggressive domestic investment plan involving 30 chaebol. The target investment in the plan, 151.40 trillion won (US$139.92 billion), was not only the largest in history but also 12.3% larger than the previous year. In August, the FKI spearheaded the formation of the ‘Save the Economy’ Special Committee, with five economic organizations and representative groups from ten industries, repeating “there have been no setbacks in our pursuit of the planned investment.”

The government responded to these actions with aid and relaxed regulations. When the Special Committee to Save the Economy held its second meeting on Nov. 30, Minister of Strategy and Finance Park Jae-wan was in attendance. He told the assembled leaders that the government had “already implemented 27 of the 103 suggestions made by the business world and were pursuing the remaining 76 according to plan.”

However, no one at this meeting made a presentation on how well the chaebol were following through on their investment plans. This is probably because investment wasn’t actually being expanded as promised. Rather, they are so low that it almost looks like capital has gone on strike. While the government has taken aggressive steps to improve the conditions for investment, business leaders are running the risk of being slammed for writing checks they can’t cash.

Entrenched weak investment under the MB administration

A more serious problem is the fact that the slump in investment is believed to have become chronic since President Lee Myung-bak took power. Average annual increase in capital invested during the five years of the Lee administration is 0.3%, compared to 3.2% under the preceding Roh Moo-hyun administration. Despite the fact that Roh had considerable friction with business leaders and Lee has always presented himself as a pro-business president, the rate of investment increase under Lee fell to one tenth of what it was under Roh.

Business figures mention the worsening of the domestic and overseas business environments as the reason for the slump in investment. And to be sure, the situation abroad has become much more unfavorable. However, there is a certain sense in which blaming the domestic economy is contradictory. That is to say, slack investment is not only a result of a domestic downturn, it is at the same time the greatest cause of that downturn. When the Korea Development Institute (KDI) announced recently that the expected economic growth rate for next year was 3%, they pointed to the slump in investment as the key factor in low growth.

In the view of Kim Jin-ok, professor of economics at Konkuk University, “corporations seem to be hesitating to invest due to the double whammy of world economic conditions and domestic political uncertainty before the presidential election.”

“Lately, the outlook for equipment investment in small and medium-size manufacturers is poor, too,” said Kim Gye-eop, section chief at the IBK Economic Research Institute. “In the end, a recovery in investment will depend upon how effectively we can get rid of this uncertainty”

Erosion of the Fundamental Strength of the Korean Economy

If the economic growth rate next year goes no higher than 3%, the country is at a serious risk of getting stuck in the “low-growth swamp.” The real growth rate, which was 3.6% in 2011, and which the BOK predicts will be 2.4% in 2012, may fail to reach the potential growth rate next year. This would be the third year in a row, which is the first time this has occurred since 1971, when the BOK began to keep statistics on the domestic economy based on GDP.

The potential growth rate is the growth rate that can be achieved by investing as many available resources, including labor and capital, as possible, while keeping inflation in check. Since this is similar to the accumulated average of the real growth rate for several years, it is also known as the long-term growth trend. When the real growth rate falls below the potential growth rate for three years, it is only a matter of time before the potential growth rate starts to decline as well.

A drop in the potential growth rate leads to a reduction in domestic production, income and employment. As tax revenues fall, the country’s financial health is also at risk, weakening the government’s ability to take measures to stimulate the economy and to handle increasing demand for welfare. This phenomenon can be compared to the human body: if you are sick for long enough, eventually your core vitality will start to fall, leading to early aging. This is the reason why we are starting to hear more warnings about the drop in the potential growth rate. Research institutes both inside and outside of Korea are already treating the decrease in the potential growth rate as an established fact.

In the 2013 and Mid-Term Economic Outlook Report released by the National Assembly Budget Office in October 2012, the potential growth rate for the five years ending in 2016 was estimated at a yearly average of 3.7%. This is 0.7% lower than the yearly average of the four years before the financial crisis (2004-2007), when this figure was 4.4%. We can infer that the continuing slump in investment during the latter half of the Lee administration has damaged the potential growth rate.

Please direct questions or comments to [englishhani@hani.co.kr]