[Outlook]The economic bright side

The new year has begun, but the economic crisis that started last year is still at the forefront of our minds. As we sort through our resolutions for the year, many are wondering what will become of Korea’s economy.

Well, that all depends on what we do. The economy is not determined by scientific forecasts. It depends on how the government, financial institutions, companies and individuals think and behave. In other words, we create the economy.

Let’s look back at the foreign exchange crisis of the late 1990s. Most forecast that our economy would make a so-called L-shaped recovery, which means that our economic growth rate would stay flat for a long period of time. But we recovered in more of a V-shaped pattern. The first half of 1998 was worse than earlier outlooks, but the economy was restored at a faster rate in the second half of the year.

The reason was, ironically, that the crisis actually worsened. The financial crisis seemed to be confined to Asia but it spread to Brazil and Russia, and the failure of long-term capital management threatened the global economy. In response, advanced countries unleashed cash in an unprecedented way, lowering interest rates three times in a two-month span. Korea followed suit and was able to lower the interest rate substantially. Foreign capital came into the country rapidly.

According to the historian Arnold Toynbee, as challenges become greater, responses also become more powerful. It is depressing to forecast a dreary future just because a crisis is worsening. Looking back, history always takes unexpected turns. The history of the economy is full of crises and miracles.

Things are not much different today. The crisis is unusually serious, and thus countries are taking unusual measures around the world. The United States has moved to a zero interest rate and its central bank is buying corporate bonds. Japan, Europe and China also cut interest rates and expanded state expenditures. Such measures can be unexpectedly effective and powerful because currencies we use nowadays are issued on paper. It doesn’t cost much to manufacture money. International society is cooperating smoothly. Countries can issue money nearly indefinitely, until people start to feel like they’re losing money if they hold onto cash. Inflation quickly becomes a concern.

How, then, should Korea respond? We should carry out creative and effective measures to stimulate our economy, just as any other country. But there is one more thing to do: Korea must be confident about the exchange rate of its currency.

The current financial crisis is the result of the subprime mortgage issue. With prices of raw materials soaring, Korea saw a current account deficit. But many people inside and outside the country have been busy trying to find flaws in Korea’s economy, as if Korea did something very wrong.

An exchange rate is a relative price between currencies. Even if a country made economic mistakes, its failures must be more serious than the other country’s to make the value of the first country’s currency fall. One wonders why the won has depreciated by more than 50 percent at times against the dollar, the currency of a country that is full of flaws and sparked the current crisis.

We were so shocked during the foreign exchange meltdown that we still seem to believe that a financial crisis is the same as a foreign exchange crisis. Even if Korea’s real estate sector has flaws, they can’t be more serious than those in the U.S.

In Spain, more than 600 construction companies have gone under. But still, many experts were concerned about Korea’s problems and issued gloomy outlooks on its currency.

This year we must abandon baselessly pessimistic predictions that the won will depreciate even more if our economy worsens. If things get worse here, it won’t only be Korea that is suffering. Therefore, there’s no reason for the won to lose more of its value comparatively.

When the economy is in bad shape, Korea has merits that other countries don’t have. Korea’s finances are quite healthy by global standards, and it has recently handled insolvency issues in a bold manner through the Korea Asset Management Corporation.

As prices of raw materials fall, our current account has begun to show a surplus. Korea only saw a deficit in the first half of last year. The exchange rate will certainly go back to normal. During economic downturns, a reduction in imports can lead to a larger-than-expected current account surplus. In 1998, a surplus of $5 billion to $6 billion was expected, but it later turned out to be a whopping $40 billion.

When times are hard we must look at the positive and remain confident. The financial crisis could have been less serious if the foreign exchange rate had been managed correctly.

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

by Shin Jang-sup