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Savings Over Investment

Posted December. 22, 2009 13:44,   


Korean private companies are putting more money into short- and long-term deposits in financial companies including banks. The amount of long-term savings deposited for periods of more than a year climbed to 103.77 trillion won (86 billion U.S. dollars) in September, up 31.5 percent from the year before. The amount of short-term savings with a deposit period of under a year rose 24.2 percent year-on-year to 141.7 trillion won (117 billion dollars). The combined amount of short and long-term deposits equal 84.1 percent of the government budget for next year of 291.8 trillion won (241 billion dollars).

Despite the global economic crisis, Korean companies, especially large conglomerates, have fared well thanks to the weak Korean won, new markets, and drastic management reform. The number of listed companies with an annual net profit of above one trillion won (830 million dollars) is expected to rise from eight last year to 13 this year. Market capitalization of Korea’s top 10 conglomerates also grew 57.3 percent year-on-year to 472.6 trillion won (393 billion dollars) as of Thursday.

Unfortunately, few companies have taken advantage of their rising investment capability. Nominal facility investment between January and September shrunk 4.4 percent year-on-year to 68 trillion won (56 billion dollars). Real facility investment adjusted for inflation dropped 15.5 percent to 60.05 trillion won (50 billion dollars). The investment-to-disposable income ratio had reached 40 percent in the mid-1990s, but fell to 31.2 percent last year and 26.7 percent in the third quarter this year.

The reluctance of business to invest despite availability of investment capital is largely due to uncertainty over the global economic recovery and high risk in foreign exchange fluctuations. Even if they decide to invest, they face many obstacles such as regulation and intervention instead of receiving administrative support. The ensuing frustration dampens investment sentiment. The service sector is known to have high investment attractiveness and potential to create jobs, but is plagued by red tape when it comes to new investment. The fate of parliamentary bills directly related to next year’s business plan, such as extending a temporary tax deduction system, reducing the corporate tax rate, and introducing a tax deduction for R&D investment, has yet to be determined despite being pending for almost a year.

Even after investment is made after much pain, businesses have to face anachronistic allegations of tax fraud or anti-business sentiment, which consequently dampen investment. To boost investment, the government, politicians and civic groups alike should contribute to raising investment spirit. Businesses at the same time should unleash their entrepreneurship in making dramatic investment. Active investment by private companies is the surefire way to generate jobs, raise national income, expand consumption, and enable mid-to-long term economic growth.