[Viewpoint] ‘Fundamentals’ are a facadeWhenever an economic crisis looms, Korea’s finance ministers use a well-known dictum to calm foreign and local investors: “The fundamentals of the Korean economy are strong.” This statement is unnecessary when the economy is doing well, but it comes in handy when the economy sways from external shocks.
First to cite fundamentals was Kang Kyung-shik, the former vice prime minister and finance minister, in 1997, before the country sought a bailout from the International Monetary Fund. But if our fundamentals are as strong as economic leaders have repeatedly assured over the years, why does our market shake at every ripple from overseas?
We have seen it happen time and time again. When the Wall Street meltdown rattled markets across the globe in 2008, authorities constantly cited fundamentals and assured the economy’s resilience. When the markets weakened further, authorities, with urgency, trotted out emergency measures.
The crisis has returned, and now the same old tools have been pulled out. Minister of Strategy and Finance Bahk Jae-wan recently assured that Korea’s economic fundamentals and external debt levels were sound enough to absorb shocks from Europe and the United States. In Washington last week, he cited a Standard & Poor’s report, which said that Korea’s fundamentals were stronger than those of most other countries.
The problem is that few investors pay heed to the repeated rhetoric. Some even question what exactly fundamentals are. They may be gripped by fear from past experience. The alarming signs are only getting louder. Currency and stock prices are nose-diving. The cost of protecting against a default here has become more expensive than in France, where major banks have suffered downgrades in credit ratings. Won-denominated assets are taking a beating, even when the problems lie elsewhere.
Can we really afford to sit idly, believing in the so-called strong fundamentals promised by economic officials? What they refer to as fundamentals are the numbers pertaining to economic growth, current-account balance and industrial activities. They regard macroeconomics as the body of the economy and finance as the tail. If the body is strong enough, it can endure a little pain at the bottom end.
The theory could be persuasive if finance were not so dominant in the global economy. We can compare external trade and foreign exchange transactions as an example.
According to the Bank of Korea, the total turnover of global exports and imports slightly topped $32 trillion in 2008. But the Bank of International Settlements estimates that global foreign exchange trade averaged $4 trillion a day in 2010. In other words, eight days of trade volume in the foreign exchange market is tantamount to a year’s worth of global trade. And, the global foreign exchange trade is getting bigger due to increased investments in derivatives.
Macro figures cannot assure the viability of our economy. By size and influence, the financial and currency markets are bigger. What authorities believe to be the tail can in fact wag the dog. Is the finance minister really confident that our economy - with meager domestic resources to drive it - can sustain dysfunction in the financial system?
Bahk issued a verbal intervention, warning that the sharp weakening of the won is undesirable because it does not reflect the fundamental value of the economy. But the rhetoric falls on deaf ears among speculative forces. Famous hedge fund manager George Soros once raised skepticism about so-called fundamental values after earning $1 billion from hedging on the British pound in 1992. He warned that fundamental value is not a safe protection against speculation and that speculation, in fact, can change the fundamentals.
The real world does not work according to academic theories. That is a fact from which we cannot hide. Fundamentals can be no more than a paper shield. Shouting about strong fundamentals when the markets are in disarray is as irresponsible as wondering why the people’s livelihood is bad when the economy is doing so well, as officials did in the final stages of the Roh Moo-hyun administration.
Authorities must design the right strategy and approach external risks with full awareness of the weaknesses in our economy. The new crisis calls for new actions - not old-house theory and rhetoric.
*The writer is social news editor of the JoongAng Sunday.
By Nahm Yoon-ho
with the Korea JoongAng Daily
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