Pre-emptive strike neededIn the third quarter, Korea’s economic growth stood at 3.4 percent compared to the same period in 2010, the lowest rate of annualized growth in two years and also the second straight quarter in which the rate has slowed. At this rate, the country will not meet this year’s target of 4.3 percent.
Reined in spending around the world due to the ongoing credit crisis in Europe, fiscal troubles in the U.S. and belt-tightening in China have all taken their toll on exports, the primary driving engine of the Korean economy. Companies have pushed back their planned capital investments amid a worsening outlook for external markets. Consumers are also spending less. The economy may gear down to a slower mode amid market uncertainties both at home and abroad. Similar to other countries, we too are short of policy ammunition and options to fight domestic and external risks. If European countries slip into a series of default crises, or the Chinese economy faces a hard landing, authorities must make sure the country is forearmed with the necessary emergency measures.
But it is harder to maneuver in an environment of slow growth. The textbook methods to put safeguards in place include slashing interest rates and expanding fiscal spending. But the central bank cannot lower the benchmark interest rates as inflation is already hovering above 4 percent and consumer debt is hitting dangerous levels.
Further easing could fan inflationary pressure as well as consumer debt. The government cannot move out of step with the rest of the world in terms of fiscal scrutiny due to the European credit crisis.
Authorities in the government and at the central bank are no doubt racking their brains for solutions to this conundrum.
But they would be well-advised to adopt a long-term view when addressing the issue as the slowdown has been spurred by external risks rather than domestic problems.
They should fight off the temptation to resort to short-term stimuli and stabilization measures until the global economy gets back on a stable track. Only by exercising prudence will they be able to persuade consumers and companies to see their way through the hard times.
Yet they must move forward with measures to reinforce the country’s core economic strength, and make sure that domestic consumption grows to buttress the economy against external risks. The services sector must also be deregulated and liberalized to keep the economy moving.