[OUTLOOK]Step Hard on Restructuring's Gas Pedal

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[OUTLOOK]Step Hard on Restructuring's Gas Pedal

As usual, torrential rains this summer inflicted tremendous damage to people and property. Some people took issue with the accuracy of weather forecasts. However, it is easy to understand how difficult it is to accurately forecast the weather if one believes the meteorological principle of the "butterfly effect," which says that the fluttering of wings by a butterfly in New York can bring a typhoon to Korea.

As difficult a task as weather forecasting is the prediction of the economic climate. As such, we cannot just blame economic predictions that turn out to be wrong.

Because the economy has shown signs of declining recently, economic think tanks and international institutions here and abroad have lowered their predictions for Korea's growth rate this year and are more skeptical than at the beginning of the year about when the country's economy will turn the corner.

There needs to be an accurate analysis as to why the original predictions turned about to be wrong and, more important, there needs to be a series of appropriate policies based on that analysis.

It is clear that there were a complex set of domestic and international factors that worked against the original predictions. The most important of the international factors is the severe downturn of the American economy.

It is already well-known that the U.S. economy grew just by 0.8 percent in the second quarter this year, an eight-year low. Naturally, Korea's core export items such as semiconductors, computers and other information technology products, which take more than 50 percent of Korea's exports to the United States, have been hit hard by the slowdown in the U.S. economy.

But the slowdown could have been sufficiently expected since last year. Many economists took it as common sense that the American economy that grew at such a high rate of nearly five percent last year would inevitably go through a significant amount of adjustment this year.

The argument was only whether the adjustment would take the form of a hard landing or a soft one. Also prevalent among economists was an opinion that whether a hard or soft landing is made, the phenomenal growth of last year would not play itself out at least for the foreseeable future. Much of this is due to the massive amount of investment in the information technology sector during the past decade in the United States.

All in all, the tremendous effect that the slowdown in the United States would have on the Korean economy could have been amply expected. Despite this, the premise behind the prediction that the Korean economy would grow 5 or 6 percent this year was founded on the assumption that corporate and financial restructuring spearheaded by the strong reform drive of the government would reduce uncertainty in the Korean economy and heighten Korea's credibility abroad.

But to this day, there are many restructuring tasks left undone in the financial and corporate sector that are attracting international attention. There are also no clear plans for liberalizing and privatizing commercial banks that effectively became government-run banks as a result of the massive amount of bailout funds presented to deal with the banks' mounting debts.

Forcing firms out of the market in accordance with market principles is only possible when the financial sector is operating according to market principles and free from outside interference.

How about the restructuring of the labor sector? Isn't it true that the government did not do enough to bring about a healthy labor relations based on the law, principles and order and to instill more flexibility in the labor market?

While the recent criticism of the International Monetary Fund and the Organization of Economic Cooperation and Development that a lukewarm effort to settle the insolvencies of financial institutes and a slow restructuring was halting the recovery of the Korean economy is nothing new, it accurately touches the core of the problem.

What the government should do now is to show in action what it has preached in words about restructuring. The government should make it clear that its top priority lies in speeding up restructuring and it will ultimately enhance the growth potentialities of Korean economy. It would be desirable for the government to manage stimulative macroeconomic policies which would work as complementary measures for speeding up restructuring.

In addition, it is necessary to strengthen the social safety net and increase spending on vocational training of workforce to relocate them in other industries. However, it should be remembered that politically motivated policies in expectation of the series of elections next year should never be attempted.


The writer is the chairman of the Institute of Global Economics.

by Sakong Il

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