South Korea Reform Plan Resembles Japan’s Abenomics

February 27, 2014, 12:07 PM

South Korea Reform Plan Resembles Japan’s Abenomics

By Michael S. Arnold

In its swift rise out of poverty over the past half-century, South Korea borrowed heavily from Japan’s post-World War II playbook, riding the strength of huge and diversified conglomerates to become a leading exporter of cars, ships, steel and electronics.

Perhaps it’s no surprise, then, that as both countries try to revamp their economic growth models, the program outlined Tuesday by South Korean President Park Geun-hye bears some striking resemblances to Japan’s Abenomics.

Boosting consumer demand and reducing dependence on exports? Check. Cutting red tape to make the economy more nimble? Check. Putting more women to work to counter a looming demographic crisis? Check.

Presenting the plan as a last-ditch attempt to rescue the economy from a dire future? Check. Ms. Park went so far as to say that South Korea – where gross domestic product growth has slowed from 6.3% in 2010 to 2.8% last year – has “no future” without the changes envisioned in her “474” plan, so named because of the key numerical targets it posits.

“In both instances the leader of the country has explained these programs by saying the country is at some sort of threshold or decisive point and can’t continue on the path it’s on, and these reforms are necessary to snap it out of a slow-growth path ,” ING economist Tim Condon said. “In that sense, it’s a close parallel.”

Japan and South Korea aren’t the only countries in Asia now pushing reform: China also is refashioning its economy to encourage consumption and de-emphasize exports, while India, Indonesia and Malaysia are making long-overdue changes to rebalance growth and put their economies on a more sustainable path.

“In general, the theme in Korea and Japan and the rest of Asia right now is reforms to boost productivity growth,” HSBC economist Ronald Man said. That follows a period when easy money flowing into the region after the global financial crisis allowed many governments to avoid taking hard decisions about where their economies were heading.

In both Korea and Japan, the export-driven model that helped lift their countries in a remarkably short time from the devastation of war into the ranks of the world’s most important economies seems to have run its course, forcing a search for new growth drivers.

“Ms. Park may be saying that it’s difficult to forecast a return to the kind of booming global export growth that the world economy enjoyed in the early 2000s, in which case they need to find something else,” Mr. Condon said.

Japan is much further along that path: Exports amounted to only 16% of the country’s gross domestic product last year, compared to an estimated 57% in South Korea, according to HSBC Bank.

Private consumption amounted to 60% of Japan’s 2013 GDP, yet Abenomics still seeks to encourage Japanese to spend more and save less. In South Korea, where private consumption is an estimated 54% of GDP, “reducing excessive reliance on exports and improving the domestic consumption can help smooth the growth profile,” ANZ senior economist Raymond Yeung said in a commentary on Ms. Park’s plan.

One key difference is that structural reform is only one of Abenomics’ “three arrows” – and so far, the least developed. The first two arrows — massive monetary easing and targeted fiscal stimulus – have largely been responsible for the program’s successes to date in reflating Japan’s economy and reviving its dynamism.

So which plan has the greater chance of success?

“Korea’s reform path is to me more comprehensive and actionable,” Barclays economist Wai Ho Leong said. “There is significant political will to drive the structural reform agenda. And the objectives” – raising potential growth, per capita income and the employment rate – “are clearer.”

The stumbling block may be constitutional: Ms. Park is limited to one term that expires in 2018.

“The question is, can she really do so much before her term ends?” HSBC’s Mr. Man said. “Political stability could be a headwind.”