Korea should develop competitive edge in new growth industries

Korea recorded current account deficit of 660 million U.S. dollars (approx. 778.8 billion won) in April, a first deficit in seven years since April 2012. The U.S.-China trade war and a huge drop in memory chip demand have resulted in a negative year-on-year export growth for the sixth consecutive month for Korea. This in turn reduced the goods balance surplus, which shows the gap between export and import. The service account and the primary income account deficits, however, reduced compared to last April. The Bank of Korea and the Ministry of Economy and Finance said the deficit is temporary caused by a heavy dividend payment to foreigners in April adding that it will return to a surplus from May.

In fact, income from dividends recorded a huge deficit of 4.99 billion dollars in April due to a large dividend payment to foreigners. Despite a bigger dividend income deficit of 6.36 billion dollars last April, Korea registered a current account surplus thanks to an export boom. For a small nation highly affected by foreign factors, a certain level of current account surplus is a must in order to reduce the damage from external impact and stabilize the domestic economy. A sharp increase in the current account deficit between 1995 and 1996 was the starting point of the 1997 Asian financial crisis. The government should brace itself for possible crises rather than making an excuse that the deficit is only temporary. It has lowered its forecast for this year’s current account surplus from 64 billion dollars to 60 billion dollars.

Dark clouds are gathering over economies at home and abroad. The World Bank has lowered its global growth forecast from 2.9 percent to 2.6 percent on Tuesday. “Trade tensions are rising and major economies are seeing faster-than-expected economic slowdown,” said the World Bank adding that risks to the outlook remain firmly. It predicted that economic growth in East Asia and the Pacific region is likely to fall below the 6 percent mark for the first time since the 1997 Asian financial crisis. The situation is tougher for businesses. According to the financial statement analysis by the Korean central bank, one out of three companies in Korea had an operating profit that is insufficient to cover its interest payment last year.

Korea had current account deficits also in the past, but what is serious about the current situation is the competitive edge of our key industries and export industries is weakening. Developing countries are close behind Korea in our key industries, such as semiconductor, electronics, car, and petrochemical. Korea has a long way to go in nurturing new export industries. The export of Korea’s nine future growth industries, including electric cars, secondary batteries, and biohealth increased by 10-120 percent in the first quarter of the year but the total amount only stood at 14.55 billion dollars, less than that of semiconductor alone (23.2 billion dollars). A drop in export volume and a current account deficit can be recovered only when Korea’s competitive edge in new industries is enhanced.