[ECONOMIC WATCH]Small Steps to Economic Revival

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[ECONOMIC WATCH]Small Steps to Economic Revival

As summer nears, the mountains are covered with thickening foliage. But Korea's economy looks as wilted as the fallen leaves of late autumn.

As exports falter and businesses postpone investments, imports of capital goods and raw materials are also on the decline. There is mounting concern about stagflation because the economy's growth prospects are diminishing and inflation is higher than forecast. In short, we see a shrinking economy. Foreign direct investment in Korea is falling along with Korea's sinking overseas investments. And yet, we may find some solace in the fact that share prices, interest rates and the won's value, which were volatile last month, have stabilized.

Under these circumstances, the market's attention is on whether the Bank of Korea will cut the call rate, the key interbank borrowing rate. May's first meeting of the Monetary Policy Committee, the central bank's top decision-making body, will take place Tuesday, not Thursday as usual, because the bank's chief, Chon Chol-hwan, is scheduled to attend the annual Asia Development Bank meeting.

Some argue that the central bank should slash the key rate to boost the sagging economy on the grounds that although consumer prices rose sharply this year, the core inflation rate, which excludes increases in public service charges and oil and food prices, hovers around a manageable 3 percent. After President Kim Dae-jung stressed low inflation, the government formulated a series of measures to curb price rises, minimizing public charge hikes and cutting mobile phone rates. The argument for a lower rate will compete with the view that a rate cut, coupled with a weak won, will bring about inflationary pressure, making the economy even more vulnerable.

The U.S. economy grew at an estimated 2 percent in the first quarter, raising hopes of economic recovery in Korea, which depends heavily on the U.S. economy. But the U.S. unemployment rate for April stood at 4.5 percent, a 30-month high, which will eat into economic growth. It is likely that the revised first-quarter U.S. GDP growth figure will not reach 2 percent. Bad news for Koreans, who are looking forward to a U.S. recovery. A higher jobless rate may hurt the economy by discouraging consumption, which drives the U.S. economy. Therefore, the Federal Open Market Committee is expected to cut its rate by another half a percentage point on May 15. The U.S. short-term rate is 4.5 percent, lower than that of Korea.

Last week, Deputy Prime Minister Jin Nyum hinted at easing business regulations. The Federation of Korean Industries, a chaebol lobby group, and its Korea Economic Research Institute will also raise the issue this week. The task of easing regulations will take shape gradually in an effort to encourage corporate investment and adhere to the principle of corporate reform. Creditor banks will examine ailing companies under the philosophy that nonviable firms should be removed from the market any time.

Cramming for exams gives short-term success, learning over the long-term brings concrete results. We must build our economy gradually to achieve a solid foundation.

- The writer is economic news editor of the JoongAng Ilbo.

by Yang Jai-chan

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