&#91OUTLOOK&#93Korea and the war of two worlds

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&#91OUTLOOK&#93Korea and the war of two worlds

Diplomatic negotiations gave way to military action on Iraq on March 20. Militarily, this war on Iraq is an extension of the war on terrorism launched in Afghanistan. Economically, it takes the form of a power struggle between the information technology business and the oil business.
The U.S. economy enjoyed an incredible boom in the 1990s, led by information technology. But oil-exporting Middle East economies had been steadily contracting, unable to escape the slump of recession. The Asian financial crisis in the late 1990s saw the international oil price plummet to $13 per barrel due to the shortage of demand, and the Mideast economies suffered severely. Once upon a not-so-distant past, we were under the delusion that this trend would continue into the new century and that information technology would lead the world to comfortable prosperity.
History, however, does not always give it to us straight but spirals on a parade of vicissitudes. Oil producing countries launched an all-out vengeance in 2000. Pressed for survival, the Organization of Petroleum Exporting Countries successfully implemented an until-then neglected agreement on the curtailment of production and managed to raise the oil price to $34 per barrel. In retrospect, we can trace the effect of this survival tactic to the increase in interest rates in the United States, leading to the crash in the stock market that burst the “IT bubble.” Since then, the world economy has gone up and down according to the tension between the United States, representing information technology, and countries in the Middle East, representing the world’s oil production.
The war on Iraq is a crucial event in that it could decide whether a steady long-term flow of energy supplies will be provided for the world’s information technology industry to make a comeback.
Cobbling together various reports of distinguished research institutes, the dominant opinion is that this war will take six weeks at the longest, considering the extreme difference in military capabilities. With the war done, U.S. hegemony will be strengthened. After the initial war premium evaluated to be about $10 per barrel, the oil price will settle at somewhere near $20 per barrel. The dollar will strengthen, and the exchange rates of the key advanced countries will rise, restoring stability to the international financial markets at a fast speed.
But while the world economy has the chance to see a turnaround sometime this year, the shortage of demand in the information technology market will make it hard for this reversal to continue steadily.
In this case, the Korean economy would be rid of at least one big burden, avoiding the threshold of a recession. But considering the other burdens, both domestic and international, such as the international concern over North Korea’s nuclear program and allegations of accounting fraud by SK Global, it would be better not to expect a swift and painless economic recovery. To maintain the 5 percent growth rate that has been the goal at the beginning of this year, the Korean government would have to take bolder moves in applying monetary and financial policies.
The current account deficit caused by the rising prices of oil imports, which started at the beginning of the year could become even worse as the war continues and unexpected events hit exports. With the gradual stabilization of oil prices and investment inactivity, however, the current account could even be expected to record a small surplus. The problem is the cooled interest of foreign investors reacting to the shaky foreign exchange market. Without a timely recovery of foreign investment, economic instability will continue, and the domestic financial market will be constrained in its escape from the quagmire it has been placed in through the restructuring of the nation’s businesses and the bad debt and late payment problems most credit card companies are wrestling with.
Should the war in Iraq go on for months and widen to include weapons of mass destruction, the effect on the world economy would be devastating beyond all expectations. In this case, the price of oil could rise to $40 per barrel, and the world economy would tumble into a recession. This would mean a large-scale economic recession for countries heavily dependent on oil imports, such as Korea.
In short, the government should concentrate on stabilizing the economy by building a national-level crisis management program. Strong leadership in policy establishment must be maintained to ease the economic jitters and combat financial turmoil. Thus, the government must maintain the external trust in our country. If it is successful, Korea would become the biggest benefactor from the revival of the information technology industry and can use the opportunity as another springboard for development.

* The writer is the executive director of Samsung Economic Research Institute.

by Cheong Mun-kun
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