Focus on the economyThe Ministry of Strategy and Finance officially admitted that the Korean economy has taken a downturn.
While the government was focusing on the presidential election, the National Assembly election and the mad cow disease issue, the economy deteriorated sharply. Among recent economic indicators, there is no good news. The on-year gross domestic product growth has slowed to below 5 percent and on-year inflation has exceeded 4 percent. The international oil price has reached a record $120 per barrel, based on West Texas Intermediate crude. The local currency value has weakened to 1,050 won per dollar. And conditions can get worse in the future. Lee Seong-tae, governor of the Bank of Korea, said, “This year’s GDP growth will likely decline to 4.5 percent or lower.” He forecast that inflation would be higher than expected and the current account deficit would widen this year.
The outlook for the global economy is gloomier. Dominique Strauss Kahn, managing director of the International Monetary Fund, recently warned that the global economy is in a dilemma between economic slowdown and inflation. He said soaring crude oil and corn prices are not bubbles, with the weak dollar and interest rate cuts by the United States boosting inflation. It means that it is difficult for the world economy to escape from the trap of low growth and high inflation.
Now, Korea has to concentrate its attention on the economy. It was a mere fantasy that if a so-called CEO president comes into power, the economy would automatically recover. The environment surrounding the Korean economy has deteriorated sharply from a year ago. But the government now has no special measures. The existing measures, including adjustment of interest rates, foreign exchange rates and fiscal policies, can bring about negative effects. If the monetary authorities raise interest rates to curb inflation, the economy will deteriorate. If the government keeps the local currency weak against the greenback and other currencies, it will help exports increase but will add to inflationary pressures.
Accordingly, there are only a few measures left. One of them is to boost investment by reducing anti-business sentiment and loosening regulations. Labor and management should cooperate to improve labor productivity. It will take time and be painful. But it is the only way to revive the domestic economy without negative effects. Companies, households and the government should concentrate on economic recovery.