Market Reform Needed for Faster Growth: US Expert

Market Reform Needed for Faster Growth: US Expert
Barry Eichengreen

By Park Hyong-ki
Staff Reporter

South Korea needs to overcome its transitional difficulties in the restructuring of its capital, labor and industrial markets to offset the country's slow growth, driven by the strong won and low investment, said a U.S. economist.

Barry Eichengreen said that the nation's market mechanism, which has long relied on governmental policies guaranteeing big firms financing by banks for the development of products using overseas technologies and a labor market with the assurance of job security, needs to be updated and reformed.

``As Korea approaches the technological (and knowledge-based) frontier, capacity to innovate becomes more important,'' said Prof. Eichengreen of the University of California at Berkeley in a seminar hosted by the Seoul-based Institute of Global Economics Friday. Former Finance Minister Sakong Il leads the institute.

The professor added that the weight of the country's economic dependency should be shifted more onto small- and medium-sized companies, as they are ``the sources of radical new technologies.''

As part of the transformation, he said, the financial market should also focus on equities and venture capital rather than rely heavily on the banking system to sustain growth.

While emphasizing labor market flexibility, the former senior policy advisor for the International Monetary Fund advised the government to ``no longer encourage investment but to subsidize activities like research and development.''

With the deepening subprime crisis in the U.S. whose level could reach that of the Asian financial crisis due to the lack of transparency in its mortgage-backed securities market, Eichengreen warned Korea and other Asian nations to brace for a possible sharp economic downturn.

The professor noted that the housing bubble could shrink American private consumption, which accounts for about 70 percent of the U.S. economy, meaning that Asia's exports to its top destination _ the U.S. _ will lose steam.

``An economic recession in the U.S. will bring an economic recession in Asia,'' said Eichengreen, adding that this could slow China's growth, which is good for China's red-hot economy but not good for Korea whose production relies on Chinese labor and consumption.

He said that Korea's low investment is not entirely a bad sign though, as it shows that its economy is maturing, and it shouldn't blame China for hogging most of the foreign direct investments due to its low labor costs.

As for the strong won, the U.S. economist said, the Japanese yen is weak because of Japan's weak economy, and the dollar is weak because the U.S. has a current account problem, while Korean shipbuilders hedge against the risk of exchange rates.

``It's more a symptom than an independent cause of pressure on the Korean economy,'' he said.

phk@koreatimes.co.kr