Updated July. 28, 2014 02:44
Negotiations between the Argentinian government and the U.S. creditors held on July 26 local time in New York have collapsed. Argentina president Fernandez said there would be no default (dishonored debts) but there are more than a few skeptics. Argentina has already defaulted on the first try and unless it pays the 1.5 billion dollars to the U.S. creditors by July 30 or strikes a dramatic deal, the country is more likely to suffer another default, following one in 1982 and another in 2001. If Argentina falls into default, the Korean economy and the global financial market will sustain a severe blow.
Although Argentinas crisis is directly due to the differences in opinion between U.S. hedge fund creditors and the Argentinian government, fundamentally it stems from Argentinas deep-rooted populism and anti-market sentiment which results in a vulnerable economic system. As recently as in the early 1930s its per capita income was sixth in the world with a trading volume ranked in the top 20 globally. Yet politicians only conducted policies to gain the publics popularity, including wage raises, industry nationalization and expelling of foreign capital. The Argentine public, used to the sweet taste of free would often take to the streets, demanding more benefits. This has resulted in a chronic national bankruptcy. Although a parallel comparison with Argentina of Korea is difficult, it has not a few implications for Korea.
Korea Economic Research Institute President Kwon Tae-shin warned recently, among the four Asian dragons, Singapore and Hong Kong have truly become dragons while Korea and Taiwan are highly likely to lose that title. Singapores per capita income, which was 23,000 dollars 10 years ago has surpassed 50,000 dollars recently, while that of Hong Kong is close to 40,000. In the same period, Koreas per capital income has only increased from 13,000 dollars to 24,000 dollars. Regulations that go against the grain of the global trends has depressed freedom of economic activities while labor productivity has fallen, resulting in such a gap. Recently there were also earnings shocks where major Korean companies second-quarter operating income this year has plunged year-on-year by 31.7% for Kia Motors and 24.5 percent for Samsung Electronics, 28.3 percent for LG Chemical, 13.4% for Hyundai Motor Company and 7.1 percent for POSCO.
Finance Minister Choi Kyung-hwan said the government would implement bold fiscal and financial policies to revive the economy. Yet the new planned policy of pushing companies to use part of their profits on labor costs, dividend, and investment, could suppress investment while forcing non-regular workers to be promoted to regular workers is highly likely to backfire and raise unemployment. The policies should focus on bold innovation of unnecessary corporate regulation and elimination of rigidity in the labor market.