SEOUL —
In a sense, South Korea and Japan’s economies are two sides of the same coin. Both are mainly export-oriented economies. Both have had to struggle with an economic crisis – Japan had to deal with the lost decade and Korea the IMF crisis. And both economies have been characterized by large family-owned mega businesses with strong political and banking ties, with the “chaebol” in Korea and the “keiretsu” in Japan. The similar nature of these two countries’ economic cultures makes them ideal for comparative analysis.
However, despite their similarities, Korea and Japan’s economies have taken different paths. Korea’s public debt is 23% of its GDP, while Japan’s public debt is estimated to be at 200% of its GDP, the second highest in the world after Zimbabwe. And while Korea’s GDP growth is slightly positive at 0.2%, Japan’s GDP growth rate is -5.2%, which means Japan’s debt is still increasing.
Perhaps, then, there is something Japan can learn from its neighbor’s economic development. Considering the similarities of these two countries, what could Japan do to imitate Korea’s fast-paced growth? One might be easily led to believe that Japan ought to follow its neighbor’s course by raising the consumption (sales) tax. Prime Minister Naoto Kan has recently called for a national debate to gradually increase Japan’s consumption tax of 5% to 10%, which is the same rate as Korea’s VAT. After all, one could argue, Japan’s consumption tax is already the lowest in the OECD, and the last time the tax increased was in 1997.
However, Japan’s consumption tax is only a small part of the picture. Both Japan’s corporate tax and income tax are significantly higher than South Korea’s, with some individuals paying up to 50% of their salary in income tax. Overall, Japan’s taxes are significantly higher for its citizens and businesses than Korea’s taxes.
In fact, Japan ought to be lowering taxes right now to encourage more spending instead of attempting to lower the deficit. Unlike many other countries’ debts, 95% of Japan’s debt is owed to its own citizens and not to other countries, which means there is minimal time pressure for Japan to pay the debt off and lower its deficit. Also, Japan is borrowing at a low interest rate – the government can currently borrow from Japanese investors for 30 years at a mere 2% interest rate – which is another reason that paying off the public debt should not be the government’s first priority.
The government’s first priority should be to stimulate its economy, not to pay off its public debt. Prime Minister Kan could stimulate growth by lowering taxes to encourage consumer spending, which could reverse the deflationary spiral that created the debt in the first place.
And if the government insists on pursuing its agenda to reduce the national deficit, there are ways around increasing taxes, which would only cause more hoarding of the yen and greater deflation. For example, the government could use the current tax income more efficiently and eliminate unnecessary public projects. In South Korea, cuts in public spending and lowering of government subsidies were key elements to its recovery and current fast-paced growth.
Another example in which the government could use its tax income more efficiently is by allowing more corporate bankruptcy and not viewing the “keiretsu” as “too big to fail.” Korea has discontinued propping up many of its “zombie firms,” or unproductive companies that drain public funding, and allowed many chaebol companies to collapse, including what was once Korea’s second biggest conglomerate, Daewoo.
South Korea could be a role model for Japan’s recovery, and if the prime minister remains in office long enough to enact his plans, let’s hope he observes history and uses a precedent such as South Korea before changing the course – for better or for worse – of Japan’s economy.
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Victories in soccer games and figure skating over the Japanese are usually what please South Koreans, but figures show that the economic gap between the two countries has reduced significantly over the past 20 years as well.
Japan"s economy was about 11 times that of South Korea two decades ago in terms of gross domestic product, but now it is only 5.3 times larger. The ratio of the value of the two countries" stock markets fell just as dramatically from 10 times to 4.5 times during the same period.
The changes can be attributed to Korea"s fast economic growth but also to Japan"s sluggishness, a report from the LG Economic Research Institute said.
"The difficulty the Japanese economy is facing now is not a short-term cyclic recession, nor a long-term downturn of finance and manufacturing. It is chronically low economic growth," it said.
Japan"s economy is still much bigger than Korea"s and its citizens are much wealthier than Koreans. The average personal income of Koreans was $19,231 in 2008, which was less than half of Japan"s $39,726. But the pace of growth was faster in Korea, where in 1990, the average income was only $6,303, when in Japan, it was already $24,471.
The corporate world has also seen a decline of Japanese firms" status. On the annual list of the top 500 global firms published by the Financial Times, Japan had 77 companies in 2000. The number has declined since then, to 49 in 2009. Koreans firms were non-existent on the list in 2000 but six made it in 2009.
Korea increased its foreign exchange reserves to 264.1 billion last October, from 14.8 billion in 1990. This now amounts to about a quarter of Japan"s reserves.
Relatively strong growth has meant higher inflation for Korea. A study by the Bank of Korea shows that the consumer price index rose by 12.8 percent between 2005 and 2009, while in Japan the same index rose by a mere 0.3 percent.
The symbol of Korea"s growth over its neighbor is Incheon International Airport. In 2006, only five years after it opened, Incheon beat Japan"s Narita International Airport in cargo transportation. Last year, Incheon handled 2.3 million tons of cargo, while Narita had 1.8 million tons.
Some 70 airlines are now connecting cities around the world to Incheon, compared to 63 at Narita. But Narita is still ahead in the number of passengers, 31.2 million to 28.6 million.
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The country"s gross domestic product (GDP) grew by 4.2% in the first quarter compared with the same period last year.
The growth was powered by an increase in exports as well as domestic spending.
South Korea is the fourth-largest economy in Asia.
When compared with the previous three months, GDP expanded 1.4%, the fastest expansion of growth in three quarters.
Analysts say that the economy is likely to sustain the momentum going forward.
"Although external uncertainties persist, exports, which lead the South Korean economy, are solid," said Lee Sung-Kwon of Shinhan Investment Corp.
Mr Lee also said that improving conditions in Korea"s key markets, like the United States, have also contributed to growth.
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Japanese affect
While booming exports have powered Korea"s growth, analysts warn that going forward the sector faces tough challenges.
They said the disruption in Japan"s supply chain may create problems for Korean manufacturers.
Japan is working hard to rebuild infrastructure after the widespread damage caused by the earthquake and tsunami last month.
That has seen some of the biggest manufacturers in Japan suspending or reducing production at their plants, resulting in a shortage of parts and components.
Analysts say that if the problem is not fixed quickly it could start to hurt production in Korean factories and have a negative impact on the country"s growth.
"Given that our exporters depend heavily on parts imports from Japan, Japan"s earthquake may disrupt parts supply... and slow exports growth," said Kim Yoon-Gee of Daishin Economic Research Institute
"External factors"Supply chain disruptions are not the only concern for the Korean economy.
Analysts have warned that rising prices of fuel and other essential commodities could derail the country"s economic growth.
"The focus is on oil and raw material prices, and inflation," said Mr Kim.
The unrest in North Africa and the Middle East has seen a surge in crude oil prices.
The increase in the cost of fuel for transport has driven up the price of food, as well as other commodities.
Analysts say these developments remain a big threat to the economy.
"External factors continue to remain a major growth risk," said Park Tae-Kun of Hanwha Securities.
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세계의 모든 나라가 일본은 저무는 태양, 한국은 떠오르는 태양 이라고 말하고 있다. 일본이 앞선 다는것은 일본인의 말일뿐. 시야를 넓혀라.