Avoiding another Dubai

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Avoiding another Dubai

Fortunately, there are signs that the shock caused by Dubai’s call for a debt moratorium will end soon. But the aftereffects are likely to remain. If last year’s global economic crisis caused loan-deposit problems for foreign exchange holdings or financial banks, the influence of this year’s Dubai debacle has led global financial markets to closely examine their foreign debt.

Government debt is currently piling up around the world. That’s usually considered a postwar situation. The reason for the increase in national debt is that governments are increasing their financial investments to overcome the economic crisis and using public funds to nationalize insolvent finance institutions. Some even say that last year’s financial crisis has now become an economic crisis - the two are similar in terms but the problems are different in structure.

The public debt of the United States, calculated as a percentage of its annual gross domestic product, was 30 percent in the early 1990s. Currently, however, the percentage is hovering around 50. The White House anticipates the ratio will exceed 100 percent by 2019, which means the United States will have to spend more than 20 percent of its annual budget on its national debt should the current zero interest rate rise to the 3 percent level.

Korea’s public debt as a percentage of its annual GDP is around 35 percent as of this year, which is lower than that of other developed countries. But Korea’s deficit is increasing at one of the fastest rates in the world, and the national debt percentage is anticipated to reach 50 percent by the year 2013. For a country with a limited free economy, the ratio is nowhere near safe.

If predictions that Korea’s economic growth rate next year will reach the 5 percent level prove correct, there will be room for Korea to work on improving its national debt. We must devise measures to counter the liability crisis that is sure to hit the world after the economic crisis. First, the country should work harder to verify the appropriateness of large-scale public projects and should decrease its budget for projects that are inefficient. Rather than reducing taxes indiscreetly, there should be policies to increase tax revenue.

It has become impossible to keep increasing the budget. Global credit firms could start giving countries low credit ratings, and if a country is rated as financially unstable even once, it will be hard for that country to overcome its credit rating. When foreign creditors pull out, it is difficult to escape incidents like the one in Dubai. As long as the level of the national debt remains the key to a nation’s survival, Korea should focus on reducing its national debt.
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