World Economy

S. Korea’s Topmost Need: Reform

S. Korea’s Topmost Need: ReformS. Korea’s Topmost Need: Reform

The best way for South Korea to survive in the new world of stagnation is structural reform of the economy and shoring up competitiveness against Japan and China by focusing on high-end products and services, according to analysts.

Emily Dabbs, an economist at Moody’s Analytics, said that the missing ingredient to stronger sustainable growth in South Korea is reform, Yahoo reported.

“Policies aimed at addressing slowing productivity growth, such as labor market reform, tend to face a public backlash and may have negative short-term impacts. However, without some form of reform, South Korea’s economy will likely slow,” she said.

“The government’s policy to address the growing number of unprofitable businesses will help improve productivity and boost competitiveness,” Dabbs added.

She pointed out that while there may be some short-term pain as businesses that are unproductive close their doors, by focusing on areas of comparative advantage, South Korea can improve its export competitiveness and boost economic growth.

“A number of South Korean firms are already looking at how to differentiate themselves from cheaper rivals in China. Focusing on new technology, such as green cars in the automotive industry, will help distinguish South Korean brands in competitive export markets.”

South Korea is being sandwiched between Japan and China as its value proposition?quality products at cheap prices?does not work anymore due to the rise of Chinese players and the recovery of Japanese players.

“I believe South Korea will likely grow at a slower pace than previous years as it struggles with softer global demand and increasing competition from rivals in China,” she added. “However, if the government can work with industry to bolster productivity, South Korea may return to a stronger level of growth in the coming years.”

Paul Gruenwald, an Asia-Pacific chief economist at Standard & Poor’s, said that the South Korean economy is facing two main headwinds.

“The first is the slowdown in global trade growth, which affects South Korea more than many other countries given its openness and its reliance on net exports for growth,” he said.

“The second is the rebalancing of Chinese growth away from investment and towards consumption and services. China is South Korea’s biggest trading partner and a large share of these exports has been capital and intermediate goods.”

Gruenwald said that the way out for South Korea is to match China’s internal rebalancing with a rebalancing of its own export basket.

Stijn Van Nieuweburgh, an economics professor at New York University, also said that reform is a must for South Korea to rejuvenate the economy.

“Like Japan, South Korea needs to keep moving up the value chain: high quality high-end products that are cutting edge at high prices. Stimulate education, stimulate entrepreneurship, change the culture to encourage more risk taking.”