S. Korea hit by high-cost economy
By Riyadi
SEOUL (JP): Despite its grand vision for its economic future, South Korea continues to suffer from a chronic high-cost economy and defiant current account deficit.
In Korea's grand vision for its economy by 2020, the country hopes to have its economy in the same league as the group of Seven nations with Gross Domestic Products of US$4 trillion (at 1995 constant prices), an export volume of $1.2 trillion per annum and per capita income of over $30,000 by 2020.
However, high domestic production costs plagues Korean businesses, especially in the form of high costs in financing, land use, labor, freight distribution and government services, an economist noted.
"Our financing cost is twice as expensive as that in developed countries because of our less developed and somewhat protected financial sector," Soogil Young, president of the Korea Transport Institute, said here this week.
Speaking at the third Next International Generation Leaders' Forum, Young noted that South Korea's capital market and banking industry are inefficiently run.
"Our capital market is almost closed to foreign investors... And our banking sector remains highly regulated and relatively closed to foreign participation," Young said.
Korea's businesses also face high costs in land use as the government strictly limits the use of land for new industrial projects and other urban purposes.
Only 4 percent of the country's land has been made available for urban and industrial use since 1990. Other land is mostly zoned for traditional use, especially farming purposes, Young said.
However, the urbanization process will prevail. Currently, out of Korea's total population of some 45 million people, 12 million people live in Seoul.
Congestion in cities like Seoul has increased the cost of freight distribution to 15 percent of Gross Domestic Products, much higher than the 10 percent in the United States and 9 percent in Japan.
"Of the high costs in freight distribution, 60 percent is due to cost factors," Young said, adding that such high costs in transportation results from the use of heavily congested roads.
Labor costs
Meanwhile, labor costs also keep increasing by almost 15 percent per annum in South Korea owing to the tight domestic labor market.
Labor unions are also getting stronger, especially since the breakdown of relations between laborers and managements of companies in 1989. Nowadays laborers go on strike whenever they are disappointed with management. A recent example is a massive labor strike at Korea's largest vehicle manufacturer, Hyundai Motor Company, which crippled the company's operations.
On top of all the high costs, the government further burdens businesses by creating higher costs in public services. "Businesses often have to pay unnecessary costs in dealing with the government," Young said.
In addition, a number of state-owned firms or agencies inefficiently run public utilities, including ports and airports. "All this happens because unnecessary regulations remain intact."
He acknowledged that the government has introduced a number of deregulation measures to reduce the cost of dealing with the bureaucracy. However, the people still demand more as they do not really feel the impact of such deregulations, Young said.
He suggested that the government continue with its deregulation efforts to bring down the costs of doing business and halt the deepening of the country's current account deficits, resulted from continuing deficits in services trade.
According to the Korea Institute for Industrial Economics and Trade, South Korea has suffered trade deficits in the form of "invisible" transactions in the services sector since 1990, when it suffered a services trade deficit of US$450 million. The deficit jumped to $1.59 billion in 1991 and $2.61 billion in 1992, then decreased to $1.92 billion in 1993 before it increased to $1.99 billion in 1994 and skyrocketed to $3.51 billion last year.
In the first four months of this year, the invisible trade deficit in services nearly doubled to $2.32 billion from $1.17 billion in the same period of last year. The gap accounted for 35.4 percent of the country's current account deficit of $6.56 billion recorded in the first four months of this year -- already more than the government's target of $6 billion for the whole of 1996.
In early 1990, deficits from invisible transactions accounted for only 20 percent of Korea's current account deficits.
Given the current trend, Hahn Jin-soo, a senior research fellow at the Daewoo Economic Research Institute, predicted that South Korea will chalk off an invisible trade deficit of $5 billion to $6 billion this year.
Concurring with Hahn's prediction, Huh Kwang-sook, an economist at Korea Institute for Industrial Economics and Trade, noted that the country's invisible trade deficit is certain to increase further in the coming years.
"Invisible items such as services and investment incomes will account for a larger fraction of the nation's current account transactions in the future in step with rapid growth in the services industry and growing internationalization of domestic corporations," Huh was quoted by English-language daily The Korea Herald on Wednesday.
Both the government and the private sector agree that the main culprits behind the increasing invisible trade deficit are increased Korean foreign travel, rising royalty payments by Korean firms and decreasing Korean investment incomes overseas.
According to Korea's Ministry of Finance and Economy, the number of Koreans making overseas trips increased by 21 percent to 3.82 million last year from 3.15 million in 1994. Meanwhile, the number of visiting foreign tourists increased by only 4.7 percent to 3.75 million last year from 3.58 million in 1994.
During the first four months of this year, the number of Korea's outbound travelers rose by 20.8 percent to 1.44 million from 1.19 million in the same period of last year. Meanwhile, the number of inbound tourists edged up by 0.5 percent to 1.14 million.
Korea's tourism gap surged to $1.17 billion in 1994 from $569 million in the previous year, and it slightly rose again to $1.19 billion last year.
Moreover, Korean firms spend a significant amount of foreign exchange on paying royalties on technology. Korea's shortfall in royalty payments stood at $2.08 billion last year, up from $1.56 billion in 1994. For the first four months of this year, Korean firms paid to foreign firms $810 million more than they received in royalties, compared to $610 million recorded in the same period of last year.
Another big factor which adds to the invisible trade deficit is Korea's decreasing net profit on investment abroad, compared to the net profit of foreign investments in the country. Korea's investment earnings gap has been increasing since 1990, when it amounted to $955 million. The deficit increased to $1 billion in 1991, to $1.14 billion in 1992, to $1.33 billion in 1993, to $1.67 billion in 1994 and to $2.38 billion last year. And the gap increased by 37 percent during the first quarter of this year to $482 million.
Under this context, many local economists agree that now is the time for the government to monitor the problem and come up with appropriate steps to curtail the country's current account deficit, especially the deficit of invisible trade in services.