[VIEWPOINT]Can We Avert a Second Economic Crisis?

Korea's economic growth rate started to plunge at the end of last year and exports in March shrank for the first time in two years. The value of the won against the greenback has sunk to a 30-month low and the benchmark stock index has dipped below 500 points for the first time in 26 months.

It is no surprise that anxiety is widespread among the public. The jitters may cause cuts in consumer spending and investments and worsen the economic situation. But it is no use simply urging the public not to worry; it has to have an accurate understanding of the situation. That our economy is in a highly grave situation cannot be denied. A second crisis is looming, for which three causes are at work.

First, the U.S. economy, which sustained a high growth almost without interruption for 10 years, screeched to a halt in the second half of last year. By providing the export market for many newly emerging economic powers, including Korea, the United States helped them overcome the financial crisis of 1997 and 1998. That engine is now almost dead.

Second, the Japanese economy, which had shown signs of recovering from the unprecedented negative growth of 1996-1997, became depressed again in the second half of last year and is extremely stagnant. Consumption and investments are slack, deflation is rearing its head as prices and asset values drop, and the Nikkei Stock Average repeatedly closes at record lows, while the yen continues to weaken. Japan's demand for imports remains flat, thus depressing exports from Korea and other East Asian countries. The weak yen also drags down the value of other East Asian currencies, the Korean won in particular.

The recent slowdown in growth and the spreading weakness of Korea's economy largely stem from these external factors, but not entirely. The third reason is the erosion of the credibility of the nation's economy as these external factors intertwine with the domestic situation. The most serious problem is the delay in the liquidation of countless insolvent companies due to government bailout measures, which increase moral hazard and investment risks, and threaten the health of financial institutions and national finance.

Fortunately, the U.S. economic slowdown is a part of the economic cycle, and its economy is expected to pick up by next year. Some predict that recovery will begin from the second half of this year, but that is far from certain. What this means is that we have to be prepared for the possibility of our exports diminishing over the next year. As for the Japanese economy, it is posing an extremely serious threat to Korea both in the short and long terms.

The Japanese economy has been stagnant ever since the "bubble economy" of high stock and real estate prices?reated by excess financial supply in the late 1980s?urst and launched the steady deterioration that led to today's structural depression. The elimination of bubbles aggravated corporate and financial insolvency, and the government, instead of introducing sweeping restructuring measures, tried to boost the economy primarily by expanding its fiscal spending, which further depressed the economy. At the same time, the Japanese government continued to borrow at an unsustainable level. The Japanese public, despite the virtual futility of saving due to deflated asset values and poor investments, not to mention cuts in nominal interest rates, curbed their spending in response to the rise in actual interest rates triggered by declining consumer prices. The result is an economy mired in chronic depression and instability.

From our vantage point, the biggest problem with the Japanese economy lies in the possibility that it would seek to overcome the crisis and pursue restructuring by expanding the money supply in an attempt to stimulate domestic and foreign demand. Such a policy would encourage inflation and depreciation of the yen, which would help the government repay its debt, but a plummeting Japanese currency might also drag down the value of other East Asian currencies and lead to a financial crisis similar to the one in 1997.

Due to the U.S. economic downturn and the crisis in Japanese economy, Korea's external conditions are projected to remain highly volatile for a considerable time. We have to devise various short- and long-term measures in response, but the most important step is maintaining and enhancing the confidence of international investors in our economy. To do so, we have to finish dealing with insolvent companies as soon as possible, and establish the so-called permanent restructuring system. At the same time, we need to establish a genuine labor-management cooperation system and stabilize politics. In short, the entire people have to come together to cooperate with the restructuring efforts. It may be possible to stave off a second economic crisis if such measures take place.

But in more ways than one, the current domestic situation has the earmarks of the 1996-1997 crisis situation?he free-falling yen, all sorts of social conflicts, a recurrence of violent demonstrations, and increasingly heated rivalry in the political sector.

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The writer, former Korean ambassador to the OECD, is a guest scholar at the Institute for Global Economics.

by Young Soo-gil