[VIEWPOINT]Economic forecast: lots of cloudsIn June 1997, the economy was on the road to recovery with inflation stablizing and the balance of payments turning into a surplus for the first time in nearly three years.
On July 2 of that year, Deputy Prime Minister Kang Kyong-shik wrote in a personal note that the economy was doing well and there was no reason to be apprehensive. However, on July 8, the financial crisis in Asia started with the sharp decline of Thailand's currency. Still, no one predicted its impact on the Korean economy.
Amid World Cup fever, the government recently announced an economy management plan for the latter half of the year. This year the growth rate is 6 percent, which is much higher than expected, and inflation is at a steady 3 percent. The current account surplus is expected to be more than $5 billion. The government said that it would accomplish steady growth by managing the economy with a macro policy and complete the restructuring of insolvent companies and the privatizing of banks.
However, the global financial market has a dark cloud over its head as if it is jeering the optimistic view of the Korean government. The collapsed credit of American companies that started with Enron, and the fraudulent bookkeping done byWorldCom, are direct hits on the U.S. economy. The unstable U.S. financial market has dropped the domestic stock price index to around 700, which is lower than it was five years ago. The unstable financial affairs of the U.S. economy and its staggering economic recovery and the weakening dollar, could have a negative impact on Korean exports, on which Korea depends heavily for its recovery.
It is time for the Korean government to concentrate on managing the dangers of the entire economy and making the people feel at ease. Those participating in the financial markets cannot help but react sharply. But the government should not. The continuance of policy is more important. There would be more loss if the government tries to adapt its policies to circumstances. It is only important to prevent companies from contracting investment due to market insecurity. Korea's investment rate in 1997 was 34 percent, which dropped to 21 percent during the financial crisis of 1998. These days, the rate still hovers at 27 percent.
There is no way we can stop the impact from taking place in other countries. But we can root out frailties within our country. The reason why Koreans were faced with a financial crisis in 1997 is because of insufficient reserves of foreign currency and excessive short-term debts of financial institutions. Although it is highly unlikely that the country would experience another financial crisis in liquidity like that of five years ago, the incomplete restructuring of companies and banks remains a long-term instability factor. Moody's ranked the financial soundness of our banks 70th among financial transacting countries. The KIA Group stalled our economy in 1997; Hynix has the potential of impeding our growth today. We should not delay the disposal of insolvent companies.
With the successful staging of the World Cup, it is a good time to increase our international image. We should stimulate foreign investment while increasing the transparency of our economy. In 2001, direct foreign investment has been only $3.2 billion. We should boldly improve the business environment of foreign companies. Unlike the short-term foreign capital invested in our stock market, it would be difficult for long-term foreign investment to suddenly withdraw from the Korean market. As a result such investment would help prevent foreign currency crisis from happening again.
Korea's economic experts are facing a tough road ahead. However, like the Korean soccer team, our economic experts have the potential of completing the remaining economic projects, which have not failed us in the last five years. Our chief problem: We need a coach like Guus Hiddink to lead us.
The writer is a professor of economics at Korea University.
by Lee Jong-hwa