South Korea Central Bank Warns

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South Korea's feisty central bankers are at it again. The Bank of Korea, which has regularly clashed with the government since securing independence in 1998, on Thursday warned that the world's 11th biggest economy is running out of steam.

The bank has a point. The economy, which grew 5 per cent last year, is expected to decelerate slightly this year. It is hostage to global demand

- exports make up 40-odd per cent of gross domestic product - and specifically demand for computer chips, cars and ships. Private consumption made a decent contribution to growth last year, but with household debt almost 70 per cent of GDP that could turn on a (borrowed) dime. So far, however, South Korea is no worse than many of its Asian neighbours. Indeed, on some scores it is ahead. Inflation is benign, helped in part by currency appreciation. It is too early to claim victory over the housing bubble, but February data showed a sharp contraction in monthly price rises. And exports should receive a boost if the country succeeds in pulling off its planned trade pact with the US.

Yet that same pact could also highlight South Korea's structural weaknesses and lack of competitiveness. Rigid labour laws have long acted as a brake on the economy. There is still a tendency to favour bail-outs over failures, enabling inefficient companies to linger on. The service sector is burdened with regulations; productivity has not improved in the past decade. Koreans, meanwhile, are big consumers of overseas services, particularly education and holidays - hence the doubling of the services deficit between 2004 and 2006. State intervention is another wild card in

a country that thinks nothing of ordering mobile phone operators to cut tariffs to curb inflation. The Bank of Korea's call for reform of the domestic services sector is sound. The likelihood of that warning being heeded, in an election year, is exceptionally slim.

Source Citation: "South Korean economy THE LEX COLUMN.(LEX COLUMN)(Column)." The Financial Times (March 30, 2007)
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