[OUTLOOK]The scent of an economic recovery

At last, spring is here for the economy. Industrial production is on the rise and business investment of facilities seems to show signs of recovery. With the announcement by Alan Greenspan, chairman of the U.S. Federal Reserve Board, that set this year's U.S. growth rate higher than prior expectations, the smell of spring surrounds all industrial sites.

The asset market also seems to have heard the welcome call. The Korean Composite Stock Price Index has doubled in only six months since the Sept. 11 terrorist attacks, aiming to regain the 1,000 point-high aspired by investors. The real estate market is on fire, with designated "speculative hot spots" found in practically every region of Seoul.

Some people, however, worry that this type of spring fever is dangerous. Exports continue to fall at double-digit rates, while the stock market and real estate market could be riding too hard on a barely recovering plant and equipment investment rate. The United States, of course, is the epicenter of any economic recovery. That being true, the United States has yet to see a significant rise in its stock market after the Sept. 11 tragedy, and the real estate market in the United States is maintaining only a steady pace.

In Korea, all that free-floating money is being concentrated in the asset market, causing fears that that movement is nothing but a bubble.

According to reports, Deputy Prime Minister Jin Nyum has warned that it is too early to say that the economy is fully on its way to recovery. With the flexible application of macroeconomic policies, Mr. Jin said, a stable growth rate of 5 percent within the range of potential expansion could be achieved this year.

If the economy has not yet started to recover, why are there worries that it is getting overheated? And even if this year's growth rate goes over 5 percent, the average growth rate of the past five years doesn't quite reach the potential growth rate. So why the anxiety?

There are two points to check whether the economy is indeed getting overheated. First, see if the asset market is overheated while exports and investments are still down.

Even if the Korean Composite Stock Price Index hits a magical 1,000 points, is this something to be happy about considering our actual economic situation? Or is this just another bubble waiting to burst, like in the past? No one can say for sure.

Second, we need to check if this economic recovery trend will exceed the potential growth rate and give way to a rise in prices. Our growth rate last year fell to 3 percent, but consumer prices rose beyond the Bank of Korea's upper limit of 4 percent.

With our potential growth rate under 5 percent, we cannot overrule the possibility that an economic recovery could lead to a rise in consumer prices.

Difficult as it is to land a proper diagnosis of the situation, it is even more difficult to find the right measures for it. There are, however, a few suggestions as to the direction of future policies.

The purpose of the Bank of Korea is to stabilize consumer prices and not the asset market. Monetary policies should not be applied to the asset market unless consumer prices are severely affected by it via overheating. Ideally, even if abrupt jumps in share prices or real estate values jolt the economy, interest rates should not be raised immediately. Rather, more market-friendly measures must be administered to stabilize the asset market.

However, our economic structure is too fragile for the Bank of Korea to retreat to inactivity. Demands rise for restructuring measures when share prices fall, but when prices rise again, no one seems to check whether indeed it was the restructuring measures that really brought about the trend.

Financial institutions seem to focus on household loans and credit card services, which provide quick profits, instead of loans to businesses that are involved in messy, unfinished restructuring. The household loans given out by these institutions are then released into real estate and stock investments.

Our share prices have indeed risen in comparison to the United States and even in other countries in similar positions to ours. Should the asset market's swing work itself into a fever, household debt would rise alarmingly and set back real economic recovery seriously. Share prices and real estate values must be kept under check even if it means raising interest rates.

As a last suggestion, a monetary policy to check inflation should be worked out and strictly kept according to price movements.

This year's spring heralds both economic recovery and national elections. Unless factors of inflation are dealt with in the early stages, prices could well go over the limit as they did last year.

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The writer is a professor of international trade at Hongik University.

by Park Won-am