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[EDITORIALS]First, Fight Economic Pessimism

Published: 05 Jan. 2003, 16:31

There is mounting concern that the economy may be headed for stagflation. While signs of recovery continue to elude the economy, exports are falling and prices have been rising sharply. In the second consecutive month of net decline, export figures for March dropped more than 9 percent compared to the same month last year. Consumer prices jumped 5.3 percent last month compared with a year ago, bringing the price increase so far this year to 2.5 percent and inching close to the government target of 3 percent for the entire year. Exports represent approximately 40 percent of the national product. As the 11 percent targeted increase in exports becomes a more and more distant mirage, the prospect of economic growth dims. The government may be losing ground rapidly, as any measure to stimulate domestic demand and exports to achieve the targeted 5 to 6 percent growth runs the risk of further price hikes. We cannot help but wish that economic reform had made more progress last year, when there seemed to be more room for maneuver. Even though it is belated, the government should abandon ambiguity over economic policy and make its position clear.

The government must accept the reality of a slower-than expected growth. It must lower its forecast for the year to 4 percent, and accept that it is not the end of the world. It must avoid macroeconomic policies that will force a higher growth rate, and it must say no to the political pressure for stimulus measures. It must, instead, push ahead with what remains to be done in economic reform, by restructuring the corporate and financial sectors and restoring trust and credibility in the market system.

On the trade front, the administration must take a longer-term view rather than resorting to short-sighted measures that focus on lip service or artificial means to increase exports. It must try to bring vitality back to businesses and industries. The economy has for some time focused on financial services over manufacturing, and high-tech and startup businesses rather than traditional industries. This should change if exports are to regain strength. Workable and specific means should be used to buoy traditional industries. The declining exports since March can be seen primarily as the effect of the slowing economies in the United States and Japan. While our exports have declined in total volume over that period, they have kept their share in international markets. What should be of bigger concern is the rapid decline in imports and the shrinking domestic economy it may represent. A contracting economy is a sign of pessimistic investment outlook and a slowdown in productive activities. It is here that the government's economic policy should focus. It must try to clear the uncertainties prevalent in the business community through further economic reform, followed by making those engaged in business activities to "feel good" about doing business.

Still, the government cannot afford to neglect how the prices move. We do not see prices climbing in earnest. Higher than desired increases beginning in May, when the weaker won will be incorporated into prices, may provide cause for concern, but the current economy with its lagging demand and idle capacity is not likely to provide factors that represent inflationary pressure. What we are concerned about is the inflationary pressure possibly initiated on the supply side through stimulus measures turning into an upward spiral when combined with the possible revival of domestic demand. It is based on that concern that we see the need for the government to lower its growth expectations in policy formulation.