[The Editors' Verdict] Strengthening the Export Economy Is Essential for a V-Shaped Rebound and Resolving K-Shaped Polarization

Since the end of last year, exports have shown a favorable trend, increasing by about 11% in February this year. However, there is little reason to be optimistic. Exports decreased by more than 10% compared to the previous year in 2019 before the COVID-19 pandemic, and by more than 7% last year when the pandemic struck. As export competitiveness declined, the drop in exports was much greater than the economic growth rate decline (-1%) last year. South Korea's exports are characterized by being led by a few items such as semiconductors centered on large corporations and having a high dependence on China, but even this has been shaken. Last year, exports by large corporations decreased by 7.4%, by mid-sized companies by 4.1%, and by small and medium-sized enterprises (SMEs) by 0.2%. Comparing with Taiwan, China, and Vietnam, which suffered similar COVID-19 damage, it becomes clearer that Korea's export-centered economy is in crisis. These countries had economic growth rates around 3% last year thanks to more active exports. Vietnam's exports increased by 6.5% last year, while Taiwan and China saw increases of 37% and 18%, respectively, up to February this year.

The export outlook going forward also lags behind these countries. About 20% of Korea's total exports are semiconductors, but Taiwan is shaking Korea's dominance with system semiconductors. Electric vehicles and secondary batteries are expected to grow, but these too show signs of being overtaken by China. As China's technological capabilities rise, Korea's exports to China decreased by 16% in 2019. Fortunately, the export competitiveness of SMEs and the service sector has improved. Last year, the export share of SMEs grew to 19.7%, and exports in the bio-health sector increased by 54% due to the COVID-19 pandemic, while processed rice products increased by 27% thanks to the Korean Wave. However, this is not unique to Korea. China’s government export support policies have led to a surge in SME exports in textiles, toys, and medical devices, while Taiwan’s cooperation with Japan and the United States has caused a rapid increase in SME exports of electronic products needed for remote meetings and telecommuting.

Under the current environment, it is difficult for SMEs to play a larger role in exports. Despite government support, the export share of SMEs still does not exceed 20%. Korean export SMEs are small-scale, averaging only 1 million dollars, about 1/400th of the average for large corporations (as of 2019). Large corporations have seen declines in both export share and competitiveness, and SMEs have not been able to compensate. This is due to the government's focus on income-led growth, fair economy, and peace economy policies. These policies have only strengthened regulations on companies. Although income-led growth and fiscal expansion were intended to strengthen the domestic economy, economic recession, worsening employment, and deepening income inequality have instead undermined the domestic base. Due to increased regulations, export companies have relocated to China, Vietnam, and other countries, which has boomeranged to reduce Korea's export competitiveness.

For the economy to succeed in a V-shaped rebound and resolve K-shaped polarization, exports must be revitalized. The domestic economy model is difficult to succeed in, especially with the added factor of population decline. Expanding the domestic economy through fiscal expansion only sucks money away from consumption and investment through taxes. According to the Korea Institute for International Economic Policy (2017), export companies are about twice as likely to succeed in innovation and create regular jobs compared to domestic companies, and the proportion of non-regular workers is higher in domestic companies than in export companies. Wage levels are 30% higher in export companies than in domestic companies, and wage growth is 23% faster in export companies. According to the institute’s analysis of service sector R&D and export competitiveness (2020), export companies in the service sector are twice as likely to succeed in innovation and invest three times more in R&D than domestic companies. The government must devote all efforts to strengthening the export economy.

Kim Taegi, Professor of Economics, Dankook University

This content was produced with the assistance of AI translation services.