[VIEWPOINT]Wanted: economic fundamentalsWhile Wall Street remains bearish and the economic recovery of the United States is delayed, uncertainty about the global economy grows.
After the Asian economic crisis in 1997, the Korean economy's dependency on the global economy, especially the American economy, became much stronger. First, that happened chiefly because of the opening of capital markets. Foreign investors already owned 40 percent of listed stocks, and held more than 60 percent of blue chips. Freedom in the capital markets is more susceptible to changes in the international economy than freedom in trade. Through the so-called "wealth effect," foreign money can have influence on local stocks, and the up and down of Korean stock prices can indirectly affect domestic consumption and the economic cycle.
Second, for the last four or five years, the Korean industry structure has changed dramatically. In other words, the portion of information technology in the stock market, to say nothing of exports, has grown so much that exports and stock prices in that sector are directly linked to the American economy and Wall Street.
A fierce controversy about mid- or long-term forecasts for the U.S. economy continues. What is most uncertain is the lower-than-expected profitability of American companies and a mammoth trade deficit in the country.
The huge trade deficit of the United States and the growing trade surplus of Asian countries, which swelled like a snowball after the '97 economic crisis, cannot last much longer. At present, the world's central banks, except the United States, have $1.7 trillion in foreign reserves. Asian countries such as Japan, China, Korea, Taiwan and Singapore have $1.2 trillion. America's trade deficit and increasing household debt were mainly covered by investments from those countries. But this discrepancy cannot persist anymore, and the trend may go in reverse. And this leads to a readjustment in the exchange rate between the U.S. dollar and Asian currencies. Market openings cannot be reversed. More important is that an open economy also has merit. Foreigners have made a significant oversight of insider trading and irrational decision-making by local firms.
Is spite of the restructuring done since the crisis, the Korean economy still has many fragile areas. First of all, wage levels of local workers are too steep. So far, thanks to low interest rates and a weakening won, local companies have been able to improve their profitability and the price competitiveness of exports. But if high interest rates and a strong won reappear, profitability and the competitive edge of local firms will be under pressure from expensive wages. The price of real estate and rents have skyrocketed during the past year. Those factors can also boost wage levels. And recently, it seems that there has been an economic policy swing to shortsighted populism instead of long-term policy.
Under the volatile environment of the global economy, Seoul this year must emphasize economic fundamentals rather than higher economic growth to prepare for possible cracks in the international economy and a stronger won. World Cup fever, which is sweeping the country, reminds me of Koreans' potential power.
Isabella Bird Bishop, who traveled this country at least 4 times more than 100 years ago, and wrote a book titled "Korea and Her Neighbors," praised Koreans as an energetic people. She wrote that at any moment Koreans might explode with energy, even though Koreans were then wretched and pitiful. It is true that a moment is needed in the political and economic circle to trigger a quantum leap. While the economic crisis of 1997 provided an extraneous moment to change ourselves, the World Cup led us to unite with one anther and to feel our spontaneity. It is inevitable that we endure economic shock from overseas in this small open economy. We must improve our economic fundamentals to endure any outer variables.
The writer is a professor of economics at Sogang University.
by Cho Yoon-je