[Public Voices] Global Uncertainty and the South Korean Economy

Lee Taegyu, Senior Research Fellow at the Korea Economic Research Institute
Global Instability and the Era of Protectionism
Why Industrial Competitiveness Is the Key for South Korea's Survival

As the Ukraine-Russia war drags on, a war has also broken out in Israel, making the international situation precarious as if walking on thin ice. Since the war erupted in the powder keg of the Middle East, there is a possibility of escalation to neighboring countries with vested interests, and the world is watching anxiously. International oil prices have been volatile, rising sharply after Hamas's invasion of Israel and then fluctuating. If Iran joins this war, the United States will inevitably intervene in some way. Should the Strait of Hormuz, which accounts for 20-30% of global maritime oil transport, be blocked due to escalation, oil prices will skyrocket, leaving a significant mark on the global economy. Furthermore, this will be a compounded shock to the South Korean economy, which is already struggling with export slumps, and it is clear that the government will face considerable difficulties in economic management.

So, if we endure this period of turmoil, will the world become more stable and the uncertainties that the South Korean economy must bear significantly decrease? The problem is that this is unlikely to happen. Since Trump declared American isolationism, the world has entered an era of multipolarity, and public opinion within the United States is also negative about America’s role as the world’s policeman. Therefore, President Biden, who must pay attention to elections, will not be able to reverse this trend. In the future, conflicts will arise at weak links in international political and economic dynamics around the world, amplifying uncertainties in international affairs and the economy. As a result, major advanced countries will feel the need to strengthen the stability of their supply chains, which will lead to higher protectionist barriers. This is a trend in the global economy that the highly trade-dependent South Korean economy absolutely wants to avoid, but it is certain to become the new normal of the global economy.

South Korea has no power to reverse the trend of the decline of free trade and must adapt to the new normal. The strength that enables a country’s economy to withstand international instability and various external shocks firmly is its industrial competitiveness. Only by maintaining high industrial competitiveness can a country overcome protectionist barriers, gain the choice of consumers in export destinations, and compete with products from other countries despite cost increases caused by high oil prices and other factors. Currently, advanced countries such as the United States and Europe are raising trade barriers, and middle-income countries like China are obsessed with localization. Ultimately, only by securing competitiveness that “is not replaced by (foreign products) and can replace (foreign products)” can a country survive in the era of protectionism.

When the economy is difficult, policy issues that often appear in newspaper pages are macroeconomic policies such as what to do with interest rates or whether to increase fiscal spending. However, fundamentally, macroeconomic policy variables such as interest rates and fiscal policy are tools for stabilizing the economy, not variables that enhance industrial competitiveness. Of course, economic stabilization is an important policy task for the government, but the medium- to long-term growth and survival of the South Korean economy are determined by industrial competitiveness.

Micro-level industrial policies such as protecting intellectual property rights, nurturing R&D personnel, securing labor market flexibility, regulatory reform, and creating cost-efficient industrial complexes directly affect industrial competitiveness. Therefore, discussions to enhance industrial competitiveness to overcome the waves of protectionism must be much more active in the political arena than they are now. However, most political news that dominates headlines is political engineering and partisan strife. Given the rapidly changing international situation and the structural changes in the global economy, the time given to us is not that much.

As many cases show, drafting effective industrial policies is not an easy task, and it is even more difficult to achieve policy results in a short period. Therefore, political parties must actively engage in deliberations and policy competition to secure industrial competitiveness, and this should be one of the minimum obligations of each party to the people, maintained by taxpayers’ money.

Lee Taegyu, Senior Research Fellow, Korea Economic Research Institute

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