[OUTLOOK] Coping with Global Economic Doldrums

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[OUTLOOK] Coping with Global Economic Doldrums

Concern is rising about a possible global recession. The U.S. economy is showing signs of plunging into a recession after the sustained boom it enjoyed for the last 10 years, and the Japanese economy continues to remain bogged down in recession.

Except for China, the overall Asian economy still has not recovered from the financial crisis, and some even believe it could suffer from a second financial crisis due to stalling structural reforms.

The Nasdaq stock index, representing the so-called "new economy," was under 2,000 points on March 12 for the first time in 27 months. The Dow Jones industrial average also fell below 10,000. Early this year, economic experts voiced worries that the U.S. economic expansion was coming to an end. Their fears turned into reality as key technology shares embodying the new economy shed much of their value.

For several years, many economists, key among whom are Harvard University Professor Jeffrey Sachs and Morgan Stanley Dean Witter's chief analyst Stephan Roach, have been pointing to the many bubbles in the U.S. economy. While recognizing the great contribution of advanced industries, built on the developments in information, communications and life science sectors, those supporting the bubble view thought there was too much hype about their role in U.S. economic growth. Overblown expectations kept inflating stock prices and general investors reaped capital gains far exceeding their expectations. The gains, which reflected more of a speculative bubble than fundamental valuations, fanned consumption and helped the U.S. economy to sustain an inappropriate level of growth.

U.S. stock markets then froze abruptly when the speed of advances in the aforementioned industries driving the New Economy began to slow down a year ago. Overreacting consumers drastically cut their spending and businesses scaled down their investment plans, causing the U.S. economy to take a rapid downturn.

Will the U.S. economy recover from its current doldrums? Government officials insist that the continued interest rate cuts implemented by the Federal Reserve and the Bush administration's tax cut plan will soon begin to have an effect. But optimism is scarce, considering the small effect the interest reduction on Jan. 3 had on the economy.

As for the tax reduction plan, it is not going to be implemented suddenly. Economists predict the planned tax cuts will inflate market uncertainties without having a direct bearing on the recovery of the real economy for some time.

The Japanese economy is in far more serious trouble. It has been mired in a prolonged recession for over 10 years, and every economic sector is beginning to lose vitality. The economic woes are coupled with political instability, and the government and businesses are choosing the passive path of trying to maintain the status quo. But some economic experts, including Paul Samuelson, professor at the Massachusetts Institute of Technology, and Bruce Steinberg, Merrill Lynch chief economist, do not believe the U.S. economy is "past hope" like the Japanese economy is.

These economists believe that stock markets can occasionally suffer from temporary downturns, and that the U.S. economy, which is steadily pursuing structural reforms through new technologies, is likely to stabilize as soon as the bubbles are eliminated.

The South Korean economy, which relies heavily on exports, does not really have many options to consider when the global economy is suffering from so many elements of instability. As a short-term measure, it can only adapt flexibly to the rapidly changing situation. As a long-term measure, it has to keep on making efforts to strengthen its economic structure.

The first priority lies in devising measures for the export sector, which is highly likely to contract. Orders from the United States and Japan are going to shrink. The devaluation of the yen can also hurt the price competitiveness of Korea's exports. It is important, therefore, to implement well-chosen foreign currency policies and also to diversify export channels. Markets in Europe, South America and China are maintaining comparatively normal levels of domestic demand. China, particularly, plans to pursue policies to advance its industrial structure, and it is actively soliciting imports from neighboring countries to establish a capital- and technology-intensive industrial foundation.

Japanese businesses are also searching for ways to escape from the depressed domestic economy. They are thinking of investing in countries like South Korea that still remain dynamic. If our economy succeeds in restructuring and makes the labor sector more flexible, it could become a land of opportunity in Northeast Asia in the long run. It is not desirable to be influenced by each rise and drop of the stock markets. It is undesirable to use short-term market-boosting measures. We have to concentrate on eliminating the bubbles in our stock markets and attempt to establish a strong market structure led by stocks whose value is based on good fundamentals.

by Yoo Jang-hee

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