S. Korea hit by high-cost economy<\/p>\n
By Riyadi<\/p>\n
SEOUL (JP): Despite its grand vision for its economic future,
\nSouth Korea continues to suffer from a chronic high-cost economy
\nand defiant current account deficit.<\/p>\n
In Korea's grand vision for its economy by 2020, the country
\nhopes to have its economy in the same league as the group of
\nSeven nations with Gross Domestic Products of US$4 trillion (at
\n1995 constant prices), an export volume of $1.2 trillion per
\nannum and per capita income of over $30,000 by 2020.<\/p>\n
However, high domestic production costs plagues Korean
\nbusinesses, especially in the form of high costs in financing,
\nland use, labor, freight distribution and government services, an
\neconomist noted.<\/p>\n
\"Our financing cost is twice as expensive as that in developed
\ncountries because of our less developed and somewhat protected
\nfinancial sector,\" Soogil Young, president of the Korea Transport
\nInstitute, said here this week.<\/p>\n
Speaking at the third Next International Generation Leaders'
\nForum, Young noted that South Korea's capital market and banking
\nindustry are inefficiently run.<\/p>\n
\"Our capital market is almost closed to foreign investors...
\nAnd our banking sector remains highly regulated and relatively
\nclosed to foreign participation,\" Young said.<\/p>\n
Korea's businesses also face high costs in land use as the
\ngovernment strictly limits the use of land for new industrial
\nprojects and other urban purposes.<\/p>\n
Only 4 percent of the country's land has been made available
\nfor urban and industrial use since 1990. Other land is mostly
\nzoned for traditional use, especially farming purposes, Young
\nsaid.<\/p>\n
However, the urbanization process will prevail. Currently, out
\nof Korea's total population of some 45 million people, 12 million
\npeople live in Seoul.<\/p>\n
Congestion in cities like Seoul has increased the cost of
\nfreight distribution to 15 percent of Gross Domestic Products,
\nmuch higher than the 10 percent in the United States and 9
\npercent in Japan.<\/p>\n
\"Of the high costs in freight distribution, 60 percent is due
\nto cost factors,\" Young said, adding that such high costs in
\ntransportation results from the use of heavily congested roads.<\/p>\n
Labor costs<\/p>\n
Meanwhile, labor costs also keep increasing by almost 15
\npercent per annum in South Korea owing to the tight domestic
\nlabor market.<\/p>\n
Labor unions are also getting stronger, especially since the
\nbreakdown of relations between laborers and managements of
\ncompanies in 1989. Nowadays laborers go on strike whenever they
\nare disappointed with management. A recent example is a massive
\nlabor strike at Korea's largest vehicle manufacturer, Hyundai
\nMotor Company, which crippled the company's operations.<\/p>\n
On top of all the high costs, the government further burdens
\nbusinesses by creating higher costs in public services.
\n\"Businesses often have to pay unnecessary costs in dealing with
\nthe government,\" Young said.<\/p>\n
In addition, a number of state-owned firms or agencies
\ninefficiently run public utilities, including ports and airports.
\n\"All this happens because unnecessary regulations remain intact.\"<\/p>\n
He acknowledged that the government has introduced a number of
\nderegulation measures to reduce the cost of dealing with the
\nbureaucracy. However, the people still demand more as they do not
\nreally feel the impact of such deregulations, Young said.<\/p>\n
He suggested that the government continue with its
\nderegulation efforts to bring down the costs of doing business
\nand halt the deepening of the country's current account deficits,
\nresulted from continuing deficits in services trade.<\/p>\n
According to the Korea Institute for Industrial Economics and
\nTrade, South Korea has suffered trade deficits in the form of
\n\"invisible\" transactions in the services sector since 1990, when
\nit suffered a services trade deficit of US$450 million. The
\ndeficit jumped to $1.59 billion in 1991 and $2.61 billion in
\n1992, then decreased to $1.92 billion in 1993 before it increased
\nto $1.99 billion in 1994 and skyrocketed to $3.51 billion last
\nyear.<\/p>\n
In the first four months of this year, the invisible trade
\ndeficit in services nearly doubled to $2.32 billion from $1.17
\nbillion in the same period of last year. The gap accounted for
\n35.4 percent of the country's current account deficit of $6.56
\nbillion recorded in the first four months of this year -- already
\nmore than the government's target of $6 billion for the whole of
\n1996.<\/p>\n
In early 1990, deficits from invisible transactions accounted
\nfor only 20 percent of Korea's current account deficits.<\/p>\n
Given the current trend, Hahn Jin-soo, a senior research
\nfellow at the Daewoo Economic Research Institute, predicted that
\nSouth Korea will chalk off an invisible trade deficit of $5
\nbillion to $6 billion this year.<\/p>\n
Concurring with Hahn's prediction, Huh Kwang-sook, an
\neconomist at Korea Institute for Industrial Economics and Trade,
\nnoted that the country's invisible trade deficit is certain to
\nincrease further in the coming years.<\/p>\n
\"Invisible items such as services and investment incomes will
\naccount for a larger fraction of the nation's current account
\ntransactions in the future in step with rapid growth in the
\nservices industry and growing internationalization of domestic
\ncorporations,\" Huh was quoted by English-language daily The Korea
\nHerald on Wednesday.<\/p>\n
Both the government and the private sector agree that the main
\nculprits behind the increasing invisible trade deficit are
\nincreased Korean foreign travel, rising royalty payments by
\nKorean firms and decreasing Korean investment incomes overseas.<\/p>\n
According to Korea's Ministry of Finance and Economy, the
\nnumber of Koreans making overseas trips increased by 21 percent
\nto 3.82 million last year from 3.15 million in 1994. Meanwhile,
\nthe number of visiting foreign tourists increased by only 4.7
\npercent to 3.75 million last year from 3.58 million in 1994.<\/p>\n
During the first four months of this year, the number of
\nKorea's outbound travelers rose by 20.8 percent to 1.44 million
\nfrom 1.19 million in the same period of last year. Meanwhile, the
\nnumber of inbound tourists edged up by 0.5 percent to 1.14
\nmillion.<\/p>\n
Korea's tourism gap surged to $1.17 billion in 1994 from $569
\nmillion in the previous year, and it slightly rose again to $1.19
\nbillion last year.<\/p>\n
Moreover, Korean firms spend a significant amount of foreign
\nexchange on paying royalties on technology. Korea's shortfall in
\nroyalty payments stood at $2.08 billion last year, up from $1.56
\nbillion in 1994. For the first four months of this year, Korean
\nfirms paid to foreign firms $810 million more than they received
\nin royalties, compared to $610 million recorded in the same
\nperiod of last year.<\/p>\n
Another big factor which adds to the invisible trade deficit
\nis Korea's decreasing net profit on investment abroad, compared
\nto the net profit of foreign investments in the country. Korea's
\ninvestment earnings gap has been increasing since 1990, when it
\namounted to $955 million. The deficit increased to $1 billion in
\n1991, to $1.14 billion in 1992, to $1.33 billion in 1993, to
\n$1.67 billion in 1994 and to $2.38 billion last year. And the gap
\nincreased by 37 percent during the first quarter of this year to
\n$482 million.<\/p>\n
Under this context, many local economists agree that now is
\nthe time for the government to monitor the problem and come up
\nwith appropriate steps to curtail the country's current account
\ndeficit, especially the deficit of invisible trade in services.<\/p>",
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