S. Korea hit by high-cost economy

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.