A leading global restructuring firm has said that South Korea would need to undergo another economic overhaul for it to regain global competitiveness.
According to AlixPartners LLP, the country needs an effort similar to those that followed the International Monetary Fund (IMF) bailout program in the 1990s.
South Korea is the fourth largest economy in Asia but finds itself struggling amid pressure from an exponential growth in some sectors in China. The overtaking is also being felt from neighboring Japan, whose economy is on an upward thanks to greater focus on the use of innovative technologies.
Yung Chung, AlixPartners’ managing director in Seoul, noted during an interview that Korea’s corporate sector is hurting from the effects of continued low productivity, ballooning wages as well as from overcapacity.
The country’s economic woes came to the fore in data releases over last week, with the gross domestic product (GDP) shown to have shrunk to record levels last seen a decade ago. Analysts attribute the decline to a number of factors, including reduced investments, a dwindling technology sector and a drastic slump in exports.
Data from the Korea Economic Research Institute also points to an explosion in the number of companies that post operating incomes that cannot cover interest expenses. The researchers have traced the rot to as far back as 2014, with this problem persisting despite access to low-interest rates.
According to Chung, Korea needs a “shock” restructuring akin to the IMF bailout in 1997 that forced the country into opening up to added foreign investments, resulted in massive cuts to government expenditure and introduced measures that made it easier for companies to hire or lay-off workers.
But the IMF rescue plan wasn’t popular and led to widespread protests as unemployment spiked. In a speech delivered in 2017, Korean president Moon Jae-in said the reforms drastically changed lives and affected the nation’s pride as a middle-class people.
Other than working to cut overcapacity, one other area Chung says Korea needs to work on relates to increasing the participation of the private sector in cases of insolvencies.
The country also needs to “speed up bankruptcy proceedings,” given it takes 6 months for a U.S. company to emerge from a bankruptcy proceeding. In Korea, it takes an average of 17 to 18 months, yet there is no guarantee of success.