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The South Korean economy is near the brink

It was a moment when it was as though the proposed amendments to the Commercial Act had never existed at all. Political power had surrendered to the economic powers that be.

If we continue on in this way, our suffering will be far more extreme than that of Japan during its “lost 20 years.” The question is, who will history blame for pushing South Korea into its own “lost 20 years”?

Japan’s real economic growth rate fell from the 4% range in the late 1980s to 1% in the 1990s, and down to zero in the 2000s. With a strong yen on top of price deflation, the nominal growth rate fell to below zero. But nobody had predicted that all this would lead to the agony of the “lost 20 years.” This is the story of Japan’s long downturn, which began in the 1990s.

South Korea’s economy is very similar to Japan’s. Like Japan, it can expect an increasingly aging population and has seen a temporary increase in the national income per capita. Structurally, it’s easy to show a surplus in the current account balance. The changes in South Korea’s nominal GDP after 1985 are almost exactly like the changes that were observed in Japan’s economy, with a difference of 20 years. At this rate, the South Korean economy will hit the negatives by 2020.

How can we avoid this? According to Lee Ji-pyeong, a senior researcher at the LG Economic Research Institute, there are several lessons to be learned from Japan. For example, “There’s a limit to the sort of restructuring that is patient and enduring, and simply waits for the economy to recover,” said Lee. “It’s important to respond proactively to changing trends and focus on accomplishing a restructuring that is fast and happens within a short period of time,” said Lee.

On Apr. 20, following the general elections, Minjoo Party leader Kim Jong-in urged the Park Geun-hye administration to “fundamentally restructure” the economy, citing as precedent what had happened in Japan. “For almost 10 years the Japanese government injected more than 100 billion dollars each year into the economy, anticipating recovery, but a ’lost decade‘ passed, and then the ’lost 20 years.‘ We must not follow in the footsteps of Japan,” he said.

In an address to the National Assembly on June 21, Kim proposed a solution for avoiding a long-term Japanese-style downturn. His proposed solution was economic democratization.

“The lobbying of mammoth economic powers weakens the efficiency of the market, and contributes to the creation of a monopoly, disturbing the order of a healthy capitalist market. If we continue to neglect the entitled, quasi-illegal behavior of giant corporate powers, we might end up in a serious situation, one that cannot be fixed through ordinary policies.”

On July 4, Kim proposed amendments to the Commercial Act, including such changes as the introduction of a policy for double or multiple derivative suits. Mostly the revised bill consisted of the core election pledges of President Park Geun-hye during her campaign in 2012. This shows what happened to the economic democratization election pledges of 2012 presidential candidate Park Geun-hye.

“When the fruits of growth are concentrated solely on a subsection of the population, the gaps between the social classes will grow, and damage our potential for growth. For the sustainable development of our economy, and for the creation of jobs, we must remedy this situation. Through economic democratization, I pledge to build a country where the fruits of growth are shared equally among all the members of the economy, and where growth is harmonious and inclusive.”

Even now, when I read it again, the words are powerful. After the inauguration of President Park Geun-hye, the Ministry of Justice announced, in advance, an upcoming piece of new legislation that would effectively amend the Commercial Act. Even up until that time, I believe, Park Geun-hye might have intended to pursue economic democratization. But that’s where it ended.

On August 28, 2013 at the Blue House, President Park held a luncheon meeting with the heads of South Korea’s 10 biggest chaebol. Seated next to her were Lee Kun-hee of Samsung and Chung Mong-koo of Hyundai, corporate chairmen with enormous financial power. At the meeting President Park Geun-hye said, “This government will ensure that economic democratization does not deteriorate into excessive regulation, or something that puts the chaebol in a chokehold, and that it is managed according to its original aims. I’m aware of the current controversy and anxiety over the amendments to the Commercial Act. The government will only pursue these changes after prudent investigation and after considering multiple perspectives.” And at that moment, it was as though the proposed amendments to the Commercial Act, the essence of economic democratization, had never existed at all. Political authority had bowed to economic power.

Whether President Park fell for the lies of the chaebol chairmen, who claimed that we can only create jobs and save the economy without economic democratization, or whether she got scared and backed down, is unknown. What’s certain is that President Park submitted to the opposition of establishment powers and betrayed the people.

The alliance of economic democratization between President Park and Kim Jong-in that formed during the 2012 presidential election campaign was the ideal opportunity to bring the economic powers back under the control of political authority. But the alliance collapsed after President Park’s betrayal, and economic democratization disappeared. Restructuring is impossible when finance is bigger than government.

Will President Park be able to restructure during her remaining time in office? It seems as though she feels neither the sense of urgency nor the inclination. What will happen to South Korea’s economy? At this rate, we could very well die slowly, like a frog in a slowly boiling pot of water. We will suffer more than Japan did during its “lost 20 years.” The question is who history will blame for pushing South Korea into its own “lost 20 years.”

By Seong Han-yong, political correspondent

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