[OUTLOOK]Raining on the economic parade

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[OUTLOOK]Raining on the economic parade

The economy is rapidly recovering. In last year's third quarter, growth was only 1.8 percent, but first quarter 2002 growth is expected to be about 6 percent.

Our economy was facing a crisis five years ago during the Asian slump, and we are still feeling the aftershocks. For example, critics of economic growth, who claimed it was only breeding inequality, have changed their tune after seeing what evils a lack of growth can bring. The real source of evil is a stagnant economy that increases unemployment; unemployment brings true economic inequality.

Although the economy in 2002 will most likely begin to turn up strongly, there are some skeptics who expect growth rates of about 3 percent to persist for some time. I too was among those who were skeptical about the length of the economic recovery period. The general reason for those pessimistic projections for the economy was concern about a continuation of stagnation in foreign trade and in investments in new facilities.

But other sectors of the economy, particularly the construction industry and consumer expenditures, have thrived. The economic boost first started as upper-middle-class consumers started to recover from the anxiety they had felt from the pressure of the drop in interest rates to the 3 to 4 percent level.

Our system of leasing apartments, in which landlords collect a lump sum of money up front and have the use of that money while a tenant occupies the apartment, started to fall apart as apartment prices stabilized and low interest rates meant that the lump-sum deposits from tenants could not earn as much as in the past. Building owners started to change their leasing system to monthly rent collections so that they could at least be compensated for the depreciation of the value of the building or apartment they owned. On the other hand, persons who in the past had trouble accumulating the money necessary to buy an apartment found that lower interest rates allowed them easier access to bank loans. Instead of using their cash for key money, they used it as part of the purchase price of a home. Construction companies cooperated by developing more comfortable and luxurious homes to attract buyers.

The timing of all these trends caused apartment prices to rise, but low interest rates started to lure people to the stock market with bank-loan funding. Instead of opening an account where there were no risks but low profits, people wanted to earn a lot of money by investing into the stock market even if the risks were high. In mid-September of last year the stock index was at 460, but in less than six months it rose to over 900.

Brave consumers who endured risky investments with expectations of a rise in stock prices gained handsomely by their courage. One can simply say the developments proved again the fundamental economic equation that when interest rates are halved, the stock index will double.

When prices of real estate and of stocks go up, owners of those assets feel more confident about spending, and the so-called "wealth effect" starts working; consumer expenditures increase. That consumer spending contributes to fast economic recovery and growth.

Expectation begets expectation when the momentum from the increase of profits from real estate and the stock market begin to be felt. But there is a danger that expectations can outpace the reality of the recovery, and a bubble forms. Moreover, foreign investment firms have reaped huge profits from the Korean stock market as it started to recover. They might be playing a role as the foam of the bubble.

The bubble is expected to continue because of the local elections in June, the presidential election in December, the soccer World Cup tournament, the Asian Games and the U.S. economic recovery. Such bubbles are not wings that boost the economy. The bubble will eventually burst as more people begin to notice that their expectations are not being matched by reality. That is the weakest point of our present economic recovery.

There are threatening factors such as the continuous economic slumber in Japan, the increase of oil prices in the global market and the stagnant North-South Korean relations.

The biggest potential brake to an economic recovery, however, is our 350 trillion won ($264 billion) in household debt and labor unrest that scares off investors.

Other unstable factors include the possibility that a left-wing president could be elected and concerns about erratic central bank decisions to raise interest rates. In order for the economy to truly recover, turning the bubble into wings like Pinocchio turned into a real boy, the economy will have to generate a strong recovery in exports and capital investment.


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The writer is the editor of Millennium-Emerge, a monthly magazine.

by Kang Wee-seuk

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