[OUTLOOK]Good policies can drive recovery

My field of study being economics, I am often asked questions about what the economy will be like next year or when the slowdown will end. But as most economists admit, economic experts are no better than weather forecasters as far as forecasts are concerned. Exact predictions may be impossible because unpredictable events take place from time to time in both the weather and the economy.
In particular, it is all the more difficult to predict the economy because it is affected by variables that cannot fit in a model, such as people’s psychology and government policies.
A capable government would cope with difficulties well, but an incapable government might worsen the situation. Therefore, when asked to predict the economy, I always say, “It all depends on the government,” which is not a real answer.
With the news that since the beginning of the year, the stock market has showed some bullish movement and some department stores saw their sales rise, some analysts say that it could be signs of the longed-for economic upswing. In addition, real estate prices that had long been stagnant have shown signs of going up little by little. The deputy economy prime minister has also hinted at an expectation of a recovery.
Given the recent trends in various economic indicators, it is true that there are signs of an economic recovery. Investors and consumers alike seem to be in a slightly better mood. It seems that signs of change in the government and politicians’ perception of businesses and the government’s active efforts to boost the economy, including measures to support start-up enterprises, have influenced the atmosphere for the better.
For all the favorable signs in some areas, it seems too hasty to say that the economy has entered into a full-scale recovery phase. Just as it is hard to conclude that the stock market is bullish just because prices rose for a few days, there is no knowing on a short-term basis whether the economy is turning upward or downward for the long term.
In fact, service- or self-employed-related businesses have shown almost no sign of recovery yet. For the upbeat mood in some areas to spread through the entire country, all depends on what the government and the political circles will do in the future.
If the government gives reasons for hope by continuously boosting the spirits of businesses and relieving the people of their uneasiness, this can lead to a full-fledged recovery. But if not, the fledgling economic upturn could be just a flash in the pan.
In this process, the government and investors should be especially careful not to repeat the same failures of 2000 and 2002. If the government circulates more money by increasing its expenditures and investments and reducing the key interest rate as it is currently doing, an economic recovery may be achieved a little earlier.
But this policy may lead to the same disastrous result that we saw in 2001, after the government tried to facilitate an economic recovery by facilitating bank loans and encouraging households to use their credit cards more. Because of the drastic policy to stimulate the economy in 2001, we enjoyed prosperity in 2002, with an economic growth rate of 6.3 percent. But the boom was short-lived as more households began to default on their debts, and it lasted less than a year. The aftermath of that policy failure led to the recession that has persisted to this day.
In 2001, our economy should have fundamentally increased its productivity and supply capability along with the increase in spending. The precondition for the increase in productivity and supply capability is investment in technology and facilities. If businesses are reluctant to invest in such areas, an economic revival cannot last long, even if it begins by increased spending. This is the lesson from the failure in 2002.
We should not again block out the long-awaited light at the end of the tunnel by resorting to the short-term measure of simply encouraging consumer spending. It is good for the government to help new ventures grow, but it should not end up fostering gambling as it did in the past.
Now we should gather our national strength to spur business investments, which is the way to enhance competitiveness and create jobs as well. To increase such investments, social uncertainty and conflict should be solved above all, and uncertainty about policies should also be eliminated. No economy has fared well in a country where confusion prevailed. If politics restores stability and policies become predictable, our economy will recover even faster.

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

by Kim Jong-seok