&#91VIEWPOINT&#93Hard look at economic malady

Worry about the economy is growing. Production is shrinking, the trade balance is in the red, households are groaning under the burden of excessive debt, inflation is rising and unemployment is ballooning. Though exports are still underpinning the economy, domestic consumption is decreasing rapidly.
Due to the looming war in Iraq and the North Korean nuclear crisis, foreign investors are expressing doubt on the future of the Korean economy, thus the stock market founders. There is a theory that can be used to explain the current situation. According to conventional economic analysis, economic behavior is the result of rational choice. But this fails to take into account the importance of psychology. “Rational choice” me-ans the decision-making pro-cess to achieve an economic motive, like satisfying consum-ption desire, but we cannot flatly say it is unrelated to psycholgical factors.
Nobody can have perfect market information since real economic data lag behind events. Economic decisions are made based on current perceptions, and we cannot turn our backs on the mental factors. Mental factors become more important as uncertainty grows. To stabilize economic psychology, we have to adequately understand the present state and build credibility through economic policies.
We can summarize the major economic issues we are facing now as follows. The first is that income is not increasing as much as production is increasing, mainly due to eroding trade conditions. Economic profits diminish as the prices of imported materials rise, mainly a result of oil price hikes, and as the prices of semiconductor exports drop. Together with the slowdown in domestic consumption this makes people feel worse off than the real economic index indicates.
The second is that economic growth is led by certain sectors, like information technology. The gap between flourishing sectors and those stagnating widens. The structural vulnerability grows more serious as the change in external conditions impacts the domestic economy to a greater extent than in the past. And third, external conditions are not favorable.
Fourth, big wage increases coupled with rising oil prices is weakening the price competitiveness of exports and increasing inflation pressures.
Fifth, the potential growth rate is falling due to lower population growth, a drop in the savings rate and the aging of society. The vitality of our economy has waned compared with past activity.
Policy makers have difficulty because there are few policy options. Since they cannot control the slide in semiconductor prices and rocketing oil prices, there is no way to prevent trade conditions from growing worse. As long as this trend continues, income growth rate will be lower than production growth rate. Expanding domestic consumption to spur economic growth, even though trade conditions are weakening, will shrink savings and increase the current account deficit.
It is desirable to brake an economic slump by implementing state spending earlier than scheduled. It is helpful for the government to calm investors’ uneasiness by proclaiming that it will push for the restructuring of the business environment to meet international standards. But investors will overestimate the government’s capability or lose trust in the government if it presents a hard-to-attain growth goal to bring about positive expectations.
Winston Churchill offered “blood, toil, tears and sweat” to the British people instead of providing rosy predictions. This was seen as real leadership. There is no panacea for difficult economic issues. People should not press the government to come up with hasty countermeasures.
Policy makers are inclined to cast the negatives as not as bad as they are and the positives as bigger than they are to avoid blame that they missed an opportunity. Our policy makers should bring calm to economic concerns over Korea overseas and at home by making sure that structural reform and economic globalization are the main priorities.

* The writer is president of the Korea Development Institute.

by Kim Choong-soo