[FORUM]When do we call it a ‘crisis’?Last week, the Korea Development Institute lowered this year’s estimated economic growth rate from 5.5 percent to 5.2 percent. Focusing on a few questions, let’s take a look at the difficulties and the context of such a forecast.
The first question is if the institute needed to forecast to one decimal place when economic forecasts are bound to be incorrect. If it had simply estimated growth to be about 5 percent from the beginning, it would not have to issue frequent corrections and face criticism.
In fact, economists are in a dilemma. Because they know well the errors of quantitative analysis and the limitations of forecasts, many of them want to round off decimals or at times estimate by setting a range, say, from 4 to 6 percent. But if they give figures in this manner, they are likely to be blamed for wishy-washy forecasts, depending on rules of thumb or feelings. Announcing their estimate to the tenth of a percent became the international practice, but the problem is that the possibility of predicting exactly is almost zero, so they are criticized for always being wrong, and they have to correct their forecast from time to time.
The second question is whether the Korea Development Institute should have maintained its original economic forecast rather than decrease it by a mere 0.3 percent. But we should understand that the institute may have taken enough trouble on its own to correct the figures, and we should find significance in the direction rather than the magnitude of correction. In light of the downward correction of forecasts for the second half of this year by other institutes, including the Bank of Korea and Morgan Stanley, KDI’s correction should be interpreted as foreseeing that the Korean economy will be slower in the second half.
The support for our economy during the first half was exports, which increased nearly 40 percent compared to the same period of the previous year. Domestic spending has been stagnant all along. It is also worrisome that foreign economies are expected to slow down in the second half. The U.S. economy seems to be flinching and China’s economic growth is expected to turn downward because of its tight fiscal policy. Even the construction sector, which supported domestic business, now has begun to go downhill. In this context, the outlook for next year is darker. Morgan Stanley has forecast that the growth rate next year would drop to 3.8 percent.
Lastly, an objection may be raised that it is not a crisis even if the growth rate falls to 5 percent this year and to 3 to 4 percent next year. But we should not overlook that macroeconomic figures sometimes cannot reflect the economic reality.
The present growth is led only by exports, particularly by special demand in some categories of business, and unlike in the past, narrowly based exports do not bring spillover effects. In domestic demand, there is a sense that the economy is as difficult as in the financial crisis of 1997. A sense of crisis is spreading day by day with the fear that, when exports go amiss, our economy might nosedive into a long-term recession.
Our financial sector is as problem-ridden as the real sector. Financial institutions have until now followed the directives of government, albeit reluctantly, and no big problem has surfaced yet. But when the economy further slows down, loans to small and medium-sized businesses, household debts linked to real estate and foreign capital in the stock market could be a time bomb.
But politicians are preoccupied with political struggles while pretending to be worried about the economy. The Blue House says as long as we follow the road map, the long- term outlook for our economy is bright. What is the use of the road map, however well-drawn, if the car cannot move at all? What will become of our economy if the economic deputy prime minister, who is in the driver’s seat, falls into “depression and a sense of powerlessness,” as some informed people say is happening?
I think the ruling and opposition parties should put all their energy into the recovery of the economy, taking it as the overriding task of national administration.
* The writer is an editorial writer of the JoongAng Ilbo.
by Ro Sung-tae