President Moon Jae-in’s income-led growth policy risks derailing efforts to accelerate structural reforms and encourage industrial innovation, economists say.

His economic policy directions, which were unveiled last week, barely address the two tasks, seen as crucial to boosting the country’s long-term growth potential.

Korea’s manufacturing industries have been faltering in recent years, except for a few bright spots such as the semiconductor sector. 

Local manufacturers ran their factories at an average of 80.5 percent of full capacity in 2011 but the figure fell to 78.5 percent in 2012, 76.1 percent in 2014 and 72.6 percent last year, according to data from Statistics Korea.

The factory operation rate remained at 71.6 percent in the April-June period this year, the lowest level since the second quarter of 1998 when the country went through a devastating foreign exchange crisis.

Korea’s domestic industrial output decreased for the third consecutive month in June, marking the first three-month streak of decline since July 2013.

“The difficulties facing most manufacturing exporters have been shrouded by the high performance in the semiconductor sector,” said Sung Tae-yoon, professor of economics at Yonsei University.

Semiconductor production jumped 20.8 percent last year, while overall industrial output recorded a 1 percent increase, which was seen as reflecting the low-base effect from a 0.3 percent contraction the year before.

The prolonged slump in manufacturing industries is set to cut deeper into payrolls, undermining the new government’s efforts to create more jobs mainly by expanding fiscal expenditure.

According to industry sources, the number of employees at the country’s shipyards, which are undergoing restructuring, is expected to decrease by 33,000 in the second half of 2017 from a year earlier. Steelmakers and liquid-crystal display panel manufacturers are also forecast to reduce payrolls by 2,000 and 1,000, respectively.

Economists note corporate restructuring needs to be accelerated to prevent structural problems accumulated over the past several years from further undermining the competitiveness and efficiency of local manufacturing industries.

Such efforts may bring short-term pains but will help bolster growth and employment in the long run, they say.

Drastic deregulation and labor market reform are also needed to induce companies to increase investment.

According to data released by Korea Exchange on Monday, 72 of the largest listed firms in terms of market capitalization held 115.7 trillion won ($102.9 billion) in cash and assets easy to be cashed in, as of the end of March. The sum, which is equivalent to nearly 30 percent of this year’s national budget, marked a 54 percent jump from 75.2 trillion won at the end of 2012.

Moon pledged to eliminate regulations to prepare the country for a new wave of industrial renovations during his campaign.

Since his inauguration in May, he has barely mentioned the need for regulatory reforms, while emphasizing a shift to income-led growth that calls for expanding fiscal roles.

Experts say the Moon administration is taking a misguided approach to preparing for the “fourth industrial revolution.”

It is working on measures to use the new industrial wave as growth momentum for small and medium-sized enterprises. But it is large high-tech companies -- not SMEs -- that will be the main competitors in the fields of artificial intelligence, drones, self-driving cars, 3-D printers and the Internet of Things.

The new government’s push to phase out nuclear power generation on the presumption that power demand will decrease over the long term also goes against views shared by most experts that progress in the fourth industrial revolution will be accompanied by a sharp rise in electricity use.

To adapt to the new industrial wave, government roles should be limited to leveling the ground for corporate activities.

But the Moon administration remains reluctant to lift restrictions on big data, drones and remote health care as well as to persuade ruling party lawmakers to withdraw their objection to bills aimed at promoting service industries and setting up industrial zones free of regulations.

It has also been lukewarm toward drawing concessions from labor circles to make the job market more flexible.

“If economic growth and technological renovation is overshadowed by an emphasis on the justice of distribution, the Korean economy will lose growth momentum,” said Lee Jong-wha, professor of economics at Korea University.

Economists warn that income-led growth not backed by an improvement in production will turn into debt-fueled growth.

While announcing the new administration’s policy directions last week, the Ministry of Strategy and Finance adjusted up its 2017 growth forecast in line with earlier remarks by Moon that this year’s growth rate would reach 3 percent if an extra spending plan was put in place.

Korea’s growth rate has hovered below 3 percent since 2012, except for 2014 when Asia’s fourth-largest economy expanded 3.3 percent.

The Bank of Korea recently lowered its estimate of the country’s potential growth rate to 2.8-2.9 percent for the period between 2016 and 2020, marking the first time it had set the rate below 3 percent.

Speaking to a forum of corporate executives last month, BOK head Lee Ju-yeol emphasized the need to boost growth potential by improving productivity through deregulation, new growth engines and the encouragement of entrepreneurship.

By Kim Kyung-ho (khkim@heraldcorp.com)