[VIEWPOINT]Gloom shows no sign of lifting

The bigger the hope, the bigger the disappointment can be. After President Roh Moo-hyun was a few months into his term, Koreans believed that the economy would surely rebound. After all, the nuclear threat and the war with Iraq did not affect the economy as we all had worried. But things are not so good. The 3-percent growth rate was only half of what we had forecast at the beginning of the year. The potential growth rate is lower than the international average.
What caused the slump? The most apparent factor was slack household consumption and corporate investment. Despite the superb performance in exports, production remains low. The consequent rise in unemployment and drop in investment led to an overall dampening of consumer psychology. Economic conditions are far better than in late 1997, but many Koreans said they felt that the situation was worse.
What has frozen the economy? The obvious culprit is increasing household debt, but it cannot be said that households are not spending because of that debt. Companies are not wiling to make new investments. Expectations for jobs and earnings are not high, and the uncertainty about long-term investment has discouraged companies. Even industries with high export demand would rather increase the use of existing equipment than invest in new equipment and plants.
While economists forecast that next year’s growth rate would exceed 5 percent, that optimism is hardly impressive. The potential growth rate is estimated to be 5 percent, and considering that 2003 was an especially bad year, the growth rate for 2004, which is based on last year’s performance, should well exceed 5 percent to be called satisfactory. The economy might grow even more unbalanced because of concentrated growth in a few export-driven industries.
In short, the market is not only at the bottom of the economic cycle, but has fundamental and systematic flaws. The uncertainty is great, and each economic decision has to be made with too much risk. Policy prescriptions based on past experience or foreign examples, without addressing the fundamental factors that cause the uncertainty, would only deepen the chaos in the market.
Let’s keep in mind three things. First, the growth model based on government control, a conglomerate system and debt financing showed its limits in the financial crisis in 1997. The financial shock called for financial, corporate and regulatory reforms, but the Kim Dae-jung administration neglected reform efforts near the end of its term and focused on stop-gap remedies by allowing indiscriminate household loans and credit cards. After a brief rebound of the market, the nearsighted measures resulted in debt-ridden households, an unstable financial sector and overheated real estate speculation.
Second, the rapid opening of the market made traditional macroeconomic measures obsolete. The international capital market has grown so big that the financial sector sometimes sways the economy. But many old-fashioned bureaucrats still consider finance to be adjunct to the real economy.
Third, policy decisions and implementation have become more politically sensitive, thanks to more democracy. We all expected that friction surrounding the distribution of wealth and labor-management relations would grow worse. An economic recovery will not change that. We do not need any more authoritarian “closed-door meetings” for policy decisions.
We have to change things ― reform. As amateur administrators who don’t understand the need for reform and old hands accustomed to existing practices take part in policy making, however, the government is criticized for adding to the uncertainty. After the first year of the Roh administration, the establishment is secretly giggling while reform-minded voices are disappointed.

* The writer is a professor of economics at Ewha Womans University. Translation by the JoongAng Daily staff.

by Chun Chu-song