A new American initiative to develop supply chains outside of China has put Korea both in the driver’s seat and in a delicate position to
South Korea’s Budget Plan a Global Model of Investment and Fiscal Restraint
As we’ve written recently, the government of South Korea is not waiting around for other nations to take the lead in innovation and has committed to a significant investment in innovative industries, earmarking nearly four billion dollars in its 2020 budget. This increase of more than $700 million would put a significant strain on the budgets of most similarly-situated economies.
But for South Korea, an investment of this size is a direct product of its fiscal discipline over recent years, an approach that should be a model for other nations.
In addition to a long history of living within its means, South Korea has enjoyed a budget surplus for more than 20 years. There are few other nations that claim such a track record. However, Korea also finds itself facing strong economic headwinds that are leading to an evolving investment strategy.
As a recent article in the Financial Times noted, the country is also being buffeted by tensions in the global trading system. Just as Germany, a nation that the Financial Times suggests could learn much from Korea, is facing the economic uncertainties of Brexit, so too Korea is facing tensions in its region, not the least including China’s ongoing trade battles with the United States. Like many mature nations in today’s economic climate, South Korea is also faced with an aging population and shrinking growth.
It might seem counter-intuitive for South Korea to be making such significant investments in innovation. After all, no other major economy has such a lengthy and successful record of fiscal restraint. But as a country that has banked its future on exports and fiscal discipline, it has developed what the Financial Times calls “a radically expansionary budget to boost” its slowing economy. What’s also radical is the speed with which Korea has adapted to the new global fiscal realities.
But as South Korea’s major exports – smartphones and semiconductors – face structural trends that have left consumers at a loss to justify new cell phone purchases, the South Korean government has committed to investments in job creation, research and development, and its social protection programs such as welfare payments. Spending is forecast to increase by eight percent in addition to supplementary spending announced over the summer.
The impact of this investment strategy on both business and consumer confidence are expected to result in economic growth and keep inflation moving in the right direction. Korea’s swift action in new investments coupled with a legacy of fiscal discipline should serve as a model for other economies facing the same global headwinds.