[OUTLOOK]Only Shock Treatment Will Revive Korea

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[OUTLOOK]Only Shock Treatment Will Revive Korea

There are times when an economy can fall into a deep trap - a trap or a pit so deep that, once in it, it is extremely difficult to climb out of.

We don't have to look far to see an example of economies that have stepped into such pits. The Korean economy prior to the 1960s was one. Income was so low that saving was out of the question, while consumption and investment levels were also at low levels.

The vicious cycle resulted in a slow rate of growth and low level of income; in other words, a trap of poverty.

The Japanese economy is currently in another trap. It is a trap where a zero interest rate fails to spur either investment or consumption. It is a slump no longer manageable by fixing interest rates - a so-called liquidity trap.

The American economy went through such a period during the Great Depression of the early 1930s, and some Latin American economies suffered the same fate in the 1970s when inflation rose to 10,000 percent. The case of the Latin American economies is a good example of a trap wrought by socialist economic systems that overly stressed the principle of equity.

Traps for the economy come in all forms and types, irrespective of the era or national boundaries. They are sometimes triggered by unexpected externalities, and sometimes political rhetoric running counter to market principles or rigid policies that refuse to accommodate change will trigger them.

The reasons may vary, but there is one common factor; that mere imitation of existing policies and temporary pump-priming do not provide a way out of the trap. New ideas about "shock therapies" accompanied by structural changes emerged.

Economies that have successfully climbed out of a pit were characterized by new paradigms buoyed by charismatic and vigorous leadership.

The Korean economy's climb out of its pit was no exception to the rule. A bold infusion of foreign capital and an strategy of export-oriented economic development was out-of-the-box thinking at that time. America's Great Depression was resolved through the New Deal, an economic program that stressed demand-side policies when everyone was clamoring for supply-side policies.

A study of the Japanese economy, once a model economy touted all over the word, exemplifies the lesson. During their decade-long recession, dubbed the "Lost Decade," the Japanese government adamantly reemployed the same old policies that it had used in the past. The future of the Japanese economy does not look any brighter.

The lesson of our neighboring country should strike home, because today's Korean economy is mired in a deep "debt trap," driven there by the crushing pressure of short-term foreign debts. The burden of debt flows from the households to the banks, and then flows back to the government and households in a vicious cycle of debt.

The economy may have graduated from the worst of the financial crisis, but the structural cycle remains. Figures demonstrate that bulk of debt is not shrinking, but is just moving from pocket to pocket.

Corporate debt increased from 504 trillion won at the end of 1996 to 640 trillion won as of March, 2001. The ratio of debt has dropped, but without a comparable drop in the amount of the debts. The debt burden of the government also rose to 85 trillion won from 21 trillion won during the same period; individual debt rose to 302 trillion won from 215 trillion won. Household debt now averages 20 million won per household, and aggregate national debt is nearly double the country's national income.

It is unrealistic to expect a speedy rebound in such an unfavorable economic environment. Once a country is in a debt trap, it is only natural that investment and consumption are depressed, stifled by the weight of the debt and unable to recover.

The solution to this quandary is that debt must be reduced. Public funds cannot be the key element. The funds must be paid back to the lenders or else the government will be forced to print more currency to make the repayments itself.

There are only two alternatives. One is to solicit outside funds and the other is for our companies to turn a profit. Then the public funds used for bailouts can be repaid by those companies to the government and the government and households will be free from debt.

Efficient debt management and continued restructuring should be the first priority. But more important, there should be a drastic improvement in the business environment so that companies can increase their profits.

We need to shift our thinking away from complacent regulatory measures, a sense of equity that runs counter to market principles and rigid management and labor relations practices that keep firms uncompetitive. How can we ever climb out a pit without a shock of some kind? It is time that we understood the nature of an economy mired in a debt trap.


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The writer is a professor of economics at Yonsei University.

by Jeong Kap-young

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