The government is all out to stimulate private investment, especially in the service sector, to strengthen the still-fragile momentum of economic recovery and ensure the nation’s long-run economic growth. 

In her recent New Year’s news conference, President Park Geun-hye unveiled a three-year economic revitalization plan, which can be summarized as an attempt to put the economy back on track by spurring investment.

To facilitate investment, Park pledged bold deregulation efforts in the five key service segments: medical service, education, tourism, finance and software. She promised a thorough review of investment-related regulations to remove nonessential ones.

Park also pledged to set up a task force for each of the five segments to swiftly implement already-announced deregulation measures and provide one-stop service to investors.

Following Park’s news conference, economic ministries announced plans to review regulations, including those that have remained intact despite repeated deregulation attempts by the preceding governments.

The government is determined to increase private investment as it has virtually no other option available to boost the economy. Last year, it injected a 17.3 trillion won ($16.3 billion) fiscal stimulus to revive the sagging economy. But it has ruled out such an option for this year due to the worsening fiscal balance.

Exports are expected to grow faster than last year, but they do not contribute to economic growth as much as they used to due to exporters’ heavy reliance on imported intermediate goods.

The government cannot rely on domestic demand either, as consumer spending is forecast to remain stifled due to the mounting household debt, which is believed to have topped 1,000 trillion won last year.

Thus promoting investment is the only tool left in the government’s toolbox. By increasing corporate investment, the government seeks not only to fuel the recovery but to restore Korea’s growth potential, which is essential to ensure the economy’s long-run growth.

A recent report from Hyundai Research Institute estimates the nation’s potential growth rate in the 2008-13 period at 3.5 percent, a sharp drop from the 4.6 percent between 1998 and 2007. The fall is attributed to sluggish corporate investment, especially facility investment, in the wake of the global financial crisis.

Facility investment recorded negative growth for two consecutive years in 2012 and 2013, dampening the government’s desperate efforts to keep up the recovery momentum.

The negative growth followed a steep downward growth curve since the 1997-98 Asian financial crisis. According to a report released by the National Assembly Budget Office, facility investment grew by 14 percent a year on average in the 1980s and 1990s. But in the 2000s, it plummeted to 3 percent.

As a result, facility investment’s contribution to economic growth dropped from an average 7 percent in the 1980s to 4 percent in the 1990s and further to 2.5 percent in the 2000s.

One reason for the slow growth in facility investment in the post-crisis era is a shift in management strategy of domestic corporations. Previously, they invested aggressively to secure long-term growth opportunities. But they became more conservative in making investment decisions, putting more emphasis on profitability than on expansion.

To accelerate the recovery and boost the economy’s growth potential, it is imperative to stimulate corporate investment. But given the limited amount of funds available, investment needs to be encouraged in areas that have a high multiplier effect.

In this respect, the government’s focus on the five service segments is well-advised as they have larger knock-on effects than manufacturing. For instance, for each 1 billion won in additional investment, services can create 15.8 jobs, far more than the 8.7 of manufacturing.

But this is not to say that spurring investment in manufacturing is not important. In the manufacturing sector, the government needs to encourage investment in localization of parts for export products as exporting companies’ use of imported intermediate goods is one important reason for the sluggish growth in facility investment.

Investment also needs to be encouraged in new growth industries to facilitate Korea’s transition to a creative economy. Currently, investment in manufacturing is overly concentrated in the electronics sector, which has a low multiplier effect.

To spur investment, the government pledged a bold deregulation campaign. Deregulation is important not only for the service sector but also for manufacturing. But it is a tough challenge.

The successive Korean governments have all pursued deregulation. The irony is that despite their efforts, regulations have actually tended to increase. According to the Regulatory Reform Committee, a presidential panel chaired by the prime minister, the number of government regulations in place increased from 11,303 in 2009 to 14,648 in 2012 and passed the 15,000 mark last August.

The main reason for the increase is the surge in lawmakers’ legislative proposals. In recent years, lawmakers have become enthusiastic about presenting bills as civic groups tend to assess their performance based on their legislative activities.

The problem is that lawmakers’ bills are, unlike those introduced by the government, exempted from the obligation to undergo regulatory impact assessments. To work around this obligation, some ministries even have their bills submitted through lawmakers.

To rein in regulations, Park said the government would put a cap on the number of regulations allowed in each field of business. This system will require a ministry to abolish an existing regulation if it wants to introduce a new one.

Along with this, it would be necessary to revise the relevant law to make legislative proposals written by lawmakers also subject to regulatory impact tests.

Any deregulation attempt is bound to fail without full cooperation from the main opposition Democratic Party as it involves revision of existing laws. This point has been brought home to the government by its bills on tourism promotion, which were submitted to the Assembly last year but still remain on the back burner due to the DP’s objections.

The government faces the DP’s opposition in pushing for deregulation in key areas, including medical services and education. Thus, whether Park’s deregulation campaign succeeds or not will depend largely on her ability to enlist cooperation from the recalcitrant opposition party.

By Yu Kun-ha

Yu Kun-ha is chief editorial writer of The Korea Herald. ― Ed.