Perspectives from Around the World 157

What changes will COVID-19 bring to the Korean economy?

President, Korea Institute for Industrial Economics and Trade

The COVID-19 pandemic caused by the novel coronavirus that originated in Wuhan, China has led most countries to take drastic steps to suppress the outbreak, including border closures and limitations on citizens' daily movements. Those efforts have brought economic activity to a standstill, and governments have pursued unprecedented measures to stem the economic bleeding. For its part, Korea has not instituted the more draconian restrictions on border crossings or intra-national travel found in other countries, but its tough social distancing guidelines have nonetheless caused much economic pain.

In March, service sector production fell five percent year over year; exports in April plummeted over 24 percent. Until the EU, the U.S. and other major markets for Korean goods reopen their economies, additional shocks for the Korean economy are unavoidable, given its high level of export dependence. This holds especially true for the automobile, shipbuilding and petrochemicals industries, which are positioned to absorb particularly harsh economic blows. To prevent firms in those and other key industries from descending into insolvency amid the temporary liquidity crises, the Korean government has decided to go forward with a 40-trillion won (about 33 billion U.S. dollars, or 3.5 trillion Japanese yen) rescue package.

Meanwhile, China seems to have stopped the spread of the virus domestically and has taken steps to reopen its economy, which is the ultimate destination of 25 percent of all Korean exports. This small consolation is reflected in the International Monetary Fund's negative 1.2 percent growth projection for Korea — the highest in the OECD. Other countries too seem poised to gradually recommence economic activity, but until a vaccine is developed it seems likely that "sustainable" social distancing measures will remain in place, which will significantly alter the appearance of economic activity as we once knew it.

Yet the biggest change to the Korean economy caused by COVID-19 may be the acceleration of its ongoing digital transformation. New levels of non-face-to-face economic activity have been observed in both production and consumption, both sides of which have been pressed into the greatly expanded use of remote technologies necessitated by shelter-in-place orders and social distancing. These technologies include, but are not limited to online shopping, remote learning, telemedicine and telecommuting. Products and businesses using non-face-to-face technologies were of course in popular use prior to the COVID-19 epidemic; however, even after the pandemic subsides, non-face-to-face economic activity may very well become the new normal, greatly accelerating the pace of the digital transformation.

It also seems inevitable that the global supply chain interwoven into the Korean economy will undergo a geographic transformation. The world has woken up to the risk posed by locating entire supply chains in one region, witnessing firsthand the carnage caused in the aftermath of quarantines and cessations in production. Many countries have also recognized the dangers inherent in relying on foreign production bases for essential equipment such as ventilators and masks after export restrictions created worldwide shortages. It seems clear that the global supply chain will experience a drastic reduction in geographic scope as countries begin moving to relocate production back home.

Yet it is not only the scope of the global supply chain that is poised to change, but its geographic location as well. For the last decade or so, Korea has grown on the back of the global value chain, in which China plays a crucial role as both a hub and a production base. But links in the chain are buckling under the dual pressures of heightening Sino-American trade tensions and clashing strategic initiatives in China's One Belt, One Road policy and American posturing in the Indo-Pacific region. If, after the COVID-19 epidemic is brought under control, the conflict between China and the U.S. continues to escalate, India and Southeast Asia will likely expand their role as production bases in the medium to long-term, and the battle for hegemony between the two superpowers may very well take on a new form.

It can also be seen that the pandemic has greatly accelerated business and industrial restructuring. Korea's core manufacturing industries have for years necessitated a structural shift in response to the changing nature of internal and external competition and demand structure. Marginal businesses unable or unwilling to adapt to the new digital paradigm after COVID-19 are likely to be weeded out if and when government bailouts raise debt ratios to unsustainable levels amid falling sales and profit. At the same time, we are likely to see the growth of new industries that have emerged as part of the response to the spread of the disease.

Finally, it is worth mentioning the various forms that intensifying inequality will take. Not only have lockdowns and disease control measures disproportionally affected people in lower income brackets, they have expedited businesses' use of automation, robots and unmanned service kiosks. With poor access to the digital skills necessary to succeed in this era, vulnerable social strata are likely to experience greater unemployment, widening the income inequality between the classes further yet. The productivity gap is also growing wider between the large conglomerates with the ability to realize the benefits of new digital technologies and the many SMEs that are unable to do so.

The Korean government is working on three indigenous versions of the New Deal: a Green New Deal, a Digital New Deal and a Human New Deal. Their success rides on international cooperation in fighting the disease as well as the policies for economic recovery. This is because the battle against the epidemic is not won when the spread is stopped in any single country; nor, in a globalized economy, is the recovery complete when one country alone returns to economic normalcy. Submitting to economic ethno-nationalism will lead to our mutual ruin: in the fight against COVID-19, it is worth remembering that the path to victory is only traversed in transnational solidarity.

This article was written on May 8, 2020

May 25, 2020

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