Go to contents

[Editorial] Increasing CAPEX Is Key to Economic Recovery

[Editorial] Increasing CAPEX Is Key to Economic Recovery

Posted July. 13, 2007 07:46,   


Korea’s capital expenditure (CAPEX) level was overly abundant before 1997 when the Asian financial crisis hit the nation, but has dried out since then. The capex growth rate remained only 1.2 percent from 2001 to 2005.

The Bank of Korea (BOK) looked into manufacturers with more than 7 billion won in total assets to find that their spending on tangible assets grew by 7.2 percent from the previous year, while there was 18.9 percent growth in capital assets such as stocks. With increased cash revenues, they invested in acquiring company shares more than upgrading their physical assets. And Korean companies, ranked among the 1,000 highest sales revenue generators, often stock up on extra cash that otherwise could be used to invest.

Their tendency to place immediate profit before potentially risky investment is not to blame. The Federation of Korean Industries (FKI) has chosen regulatory uncertainty as the biggest risk factor of investment. The Samsung Economic Research Institute (SERI) has pointed out that business has been passive in investment as they prepare for potentially hostile merger and acquisition (M&A) attempts.

Indeed, 54 listed companies including Samsung Electronics and POSCO bought their stocks back by as much as 5 trillion won this year, marking a 22 percent increase year on year to strengthen their control over their management rights.

Even though companies have additional money and intentions to invest, they prefer overseas investment to avoid the high wages and uneasy relations between labor and management in Korea.

This year, however, has shown signs of recovery in economic conditions and the capex level, but it is not enough. The Ministry of Finance and Economy (MOFE) expected the capex to increase 8.2 percent this year, but the BOK lowered its estimate from 6.2 percent to 4.5 percent.

When major advanced countries reached the 20,000 dollar per capita income level, their capex growth was far higher than that of their economies.

If an estimated 4.6 percent economic growth and a 920 won against the dollar rate are to be achieved as planed this year, Korea could break the 20,000 dollar income mark. But that will not result in sound economic fundamentals unless growth momentum is built with increasing spending on capex.

Increasing corporate spending on capex is the key to solidifying Korea’s growth potential for the long term. As is the case with Japan, vigorous corporate investment should be encouraged through deregulation.