[OUTLOOK]Preparing for the economic stormIs our economy maintaining its ability to recover itself? A ship is bound to roll in a storm. But one endures the storm with the faith that the ship will regain its balance and sail smoothly after the storm is over. The recovery of the economy is one issue to which we should all pay close attention. Economic conditions have worsened in Korea and the world recently. At times of a power change, there is a tendency to delay important business investment decisions until the new government’s policy is announced. Internal and external shocks such as another Gulf War, North Korea’s nuclear weapons program and allegations of accounting fraud at SK Global are all threatening the stability of the stock, foreign exchange and financial markets. With the rapid increase of uncertainty in the economy, consumer confidence and investment sentiments are down, forecasting a slump in the real economy as well. There is even speculation that the 1997 financial crisis could be repeated. It is a law of the economy that a crisis predicted is a crisis that won’t happen. Therefore, we must carefully analyze the possibility of a relapse into a crisis and find appropriate measures to prevent it. On the other hand, it is equally important to make sure that the economy does not lose the ability to continue moving forward once the domestic and international conditions get better.
Financial crises usually happen in countries with excessive short-term external debts when a heightened uncertainty about the economy sets capital flowing out of those countries. Considering our present situation, our external debts have risen but our foreign currency reserve is at $120 billion. This makes it unlikely that a crisis like the 1997 one will happen again. There are concerns that Korea’s stock prices and value of its currency have declined sharply in international markets during the last three months. While we should not overlook the negative signs that the macroeconomic indexes are showing, we should also notice that stock prices and foreign exchange rates do change in accordance with the economy; that proves that the market is still working. In a paralyzed economic system, the dynamic factors of the foreign exchange rate are not immediately reflected in the market. However, there are expectations that the market will reflect them in time and this accelerates the outflow of capital. There is a remote possibility that such a side effect will occur in a working economy.
Our government’s economic policies should be focused on the maintenance of our economy’s ability to recover. Because the new government has shifted the domestic paradigm of the economy and external shocks that could play a negative influence on our economy have happened domestically and internationally, we could lose our particular direction of economic management with the slightest slip. We must hold the attitude that everyone will share the economic burdens caused by factors that we can’t control, such as the increase of uncertainty in the world economy with the war in Iraq and the recessions of advanced countries.
All economic players must understand that reacting immo-derately with domestic policies to avoid a short-run decrease in growth, rising oil prices and an imbalance in current accounts can only bring undesirable side effects in the long run. The government should not be shy in asking the people to understand this and to ask for their cooperation. With the international oil prices rising, it is obvious that the energy consumption of the economic players cannot be maintained at the same level.
What we must guard against most is that economic players are sometimes uncooperative in restructuring attempts to turn the market more flexible in times of economic hardship. The advantage of repairing your house in advance when you are less busy is that the opportunity costs are lower.
All kinds of interest groups raise their voices at the time of a power change. One of the most worrisome things is the negative perspective shown from some parts of society on the open-door policies. It is regrettable that there seems to be a pattern of opposition from noneconomic ministries on the market opening strategies of economic ministries. The issue of compensating those who would lose from opening the economy is an internal problem and this should not rock the basic direction of our economy. Internationalization is not a choice that we can avoid. We should consider how our efforts to pursue an open economy and liberalize even during the hard times of the financial crisis are paying off now. Without efforts to open our economy further and to continue our liberalization, we will be unable to take advantage of the external conditions even when they get better. By learning to live with the rest of the world, we should maintain our ability to recover and enjoy growth once the storm is over.
* The writer is president of the Korea Development Institute.
by Kim Choong-soo