[GLOBAL EYE]Fending off ‘leadership recession’“Liquidity trap” refers to an economic situation where lowered interest rates coupled with a more liberal monetary policy are not enough to stimulate investment and consumption. Monetary policies become impotent, the value of capital stock and market prices turn down ― all culminating in low growth and a vicious cycle of deflation.
Since 1998, the Japanese economy fits neatly into this description.
Structural reforms not backed by a genuine will to confront inefficiencies and trim deadwood lead nowhere. To top it off, the relocation of domestic industries and increasingly aging demographics have left the Japanese economy in a state of structural slow growth and even in reverse gear. One Japanese media outlet, pronouncing the Koizumi administration’s reform efforts as bankrupt, diagnosed the Japanese economy’s ailments as resulting from a so-called “leadership recession.”
Worries that our own economy may fall into a similar liquidity trap refuse to recede, as the amount of floating capital doubled during the past five years.
If slow growth persists and market interest rates fall further, a situation where monetary policies are rendered useless may arise. However, unlike the Japanese who have 1,300 trillion yen ($10 trillion) in personal savings to fall back on, our situation is fundamentally different. The housing market has hit a ceiling and inflation figures show no signs of falling. Floating capital creates bubbles wherever it flows if it fails to find good investment targets.
And the fall in consumer demand in Korea results not so much from a lowered desire to consume, but from the fact that future sources of income were drained by the reckless use of credit cards and easily obtained household loans.
The liquidity trap is an economic illness most often associated with developed economies, and is rather incompatible with developing ones. The current woes of the Korean economy stem from the fact that downsizing and selling off of profitable enterprises were vigorously pursued during the 1997 financial crisis, but efforts at stimulating capital investment were shallow.
Restructuring can be labeled a process of creative destruction. Without a feasible blueprint and a grand strategy, it can only lead to destructive destruction. Failing to erect a new framework and a grand design after restructuring, the Korean economy relied excessively on real estate price increases and a heated domestic consumption market.
Such uncoordinated policies only elevated the expectations of various interest groups, often leading to deadlocks in society. The current economic confusion and depression has a domestic origin rather than a foreign one, and in particular, extra-economic causes are the main culprits. Considering that the lack of a responsible national leadership brought about such economic difficulties, it can be dubbed the Korean version of a “leadership recession.”
A recent article in London’s The Economist, reporting on the South Korean Chohung Bank incident, carried the embarrassing headline “Shaving and Investment,” in place of “Saving and Investment.” The ubiquitous shaven figure brandishing a red headband has become an all-too-familiar symbol of the “Labor Republic of Korea.”
In a country where belligerent labor organizations, unfair government intervention, and a hostile domestic press are often pinpointed as the three major obstacles to foreign investment, calls for a Northeast Asian hub or the era of $20,000-per-capita income ring hollow.
For a while, the popular campaign motto in Korea used to be the creation of a Pacific nation. All of a sudden, we find ourselves wooing China and Russia by touting the Northeast Asian identity.
In the long run, which of the continental state and maritime state models are we to pursue and succeed in creating?
President Roh Moo-hyun is a mirror image of Prime Minister Junichiro Koizumi, in that despite his sense of direction and intuition, he lacks a coherent strategy and convincing logic in implementing his policies. President Roh resorts to blunt rhetoric to get his messages across, has had his share of failed allocations of top government positions, and until now has failed to transform popular support into real change and concrete reform measures. He additionally shares common ground with his Japanese counterpart in that their respective constituencies are increasingly becoming disappointed and distanced.
The era of $20,000-per-capita income cannot be attained by a strategy that pushes us to choose between growth and distribution models.
Labor and management should work toward a social framework that allows both to share in the profits of expanded output. These are national tasks that require dedication beyond the scope of any particular administration. Nevertheless, in the face of such daunting challenges, the ruling party remains in a shambles, and the opposition, which has a majority in the legislature, is scarcely faring better. Temporary measures to jump-start the economy are not enough.
Discarding the government-led visual maneuvering mode in preference for a mechanical and systematic approach is a task that needs to be confronted if the Korean economy is to harness a real hope of escaping the “leadership recession” anytime soon.
* The writer is a senior editorial writer of the JoongAng Ilbo.
by Byun Sang-keun