Free Trade Isn't Always Good For the Masses: The Ticker

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By William Pesek

President Lee Myung Bak should think twice about popping that champagne cork as he heads back to Seoul.

The South Korean leader returns home with the freshly minted free-trade agreement that he long coveted. Yet it may be more of a victory for the U.S. economy than Lee's.

President Barack Obama says congressional passage of the deal will help create 70,000 U.S. jobs and shows that Republicans and Democrats can cooperate on measures to improve the economy. Korea may not benefit on a comparable level, according to a recent International Monetary Fund analysis.

The IMF wasn't commenting on this week's free-trade pact. In its most recent assessment of Asia's fourth-biggest economy, though, IMF staffers voiced some reservations about the viability of the mercantilist policies with which Korea is having a difficult time dispensing.

"Korea has benefited from its export-led growth model, but relying mainly on a single engine of growth makes the economy vulnerable to shocks and contributes to rising social disparities," the IMF said.

The problem: Export-supportive policies are creating a large productivity gap in the non-tradables sector of Korea's economy and restraining the growth of household incomes. This phenomenon is contributing to increasing indebtedness among both households and small to medium-sized enterprises.

Korea needs a second growth engine. Since roughly 70 percent of employment is now in services, the focus must be less on shipping goods overseas and more on entrepreneurship -- in other words, productivity-enhancing areas of the economy. That would boost incomes more broadly, reduce private debt levels, address the polarization between manufacturing and services and narrow the wealth gap.

This is a touchy subject for Lee, a former chief executive of Hyundai Group companies. He's been consistently criticized for policies that favor big business, which benefits as overseas sales surge. Thing is, Koreans are very proud of the global reputation of corporate behemoths like Samsung Electronics Co. Yet what's good for Samsung's bottom line isn't always good for Korea's 50 million people.

The key is to create and cultivate other economic engines in sync with cutting tariffs on goods. Otherwise, Lee's U.S. trade deal won't raise Korea's economic game as much as advertised.

(William Pesek is a Bloomberg View columnist.)

-0- Oct/14/2011 15:05 GMT