[SERI Column] Tasks for Korean economy in 2012

On the path to a recovery from the 2008 global economic crisis, the world has hit yet another stumbling block: negative side effects from stimulus measures implemented to boost moribund economies.

Beginning in Greece and then spilling over into Italy and Spain, the fiscal debt crisis in the euro zone is squeezing the main European growth engines, Germany and France, and other advanced economies. Now, in the midst of trying to find fundamental solutions to the crisis, the governments of advanced nations are caught between trying to stimulate their economy and holding down fiscal spending. Even the emerging economies, which were showing relatively stable growth, are suffering from slowing growth because inflation is forcing them to raise interest rates.

The Korean economy was not insulated from global turbulence in 2011 as it also endured unstable conditions. Although Korea enjoyed continuous growth with the expansion of exports, posting a record-high $1 billion in trade deals, its dependence on trade is nearing 100 percent and its vulnerability to outside shocks has significantly increased.

Korea’s trade dependence on China, in particular, has grown with the rate fast approaching 25 percent. As for domestic demand, it has been on a continuous downward trajectory due to dampened consumer sentiment and lack of investment weighing down the economy. Many Korean households are experiencing extreme difficulties due to the decline in their real wages caused by rising inflation and increasing household debt. And Korea’s financial market has also shown signs of instability. Although the foreign exchange rate and banks are more financially sound than they were in 2008, when the global financial crisis erupted, the vulnerability of Korea’s financial markets from outside shocks remains high.

There are growing concerns the current economic instability will intensify in 2012. The possibility of long-term slow growth by the global economy is rising due to the private sector’s insufficient recovery and exhausted government options to stimulate the economy.

The Korean economy also requires a considerable amount of time to find its way back to the pre-crisis growth. Further aggravating matters, the death of North Korean leader Kim Jong Il has increased instability on the Korean Peninsula. These and many other difficulties are expected to weigh on the economy in 2012, so Korea will need to discover hidden opportunities in the current crisis.

Korea’s task for the coming year is to overcome the current “low-growth structure.” To do so, Korea firstly needs to adopt economic stabilization measures that will eliminate risky factors threatening the domestic economy. In this process, reining in inflation, which has hounded so many households, must be the main priority. Rather than taking on policies such as hiking interest rates, which can constrain the overall economy, stabilizing prices of individual products with customized strategies would be more effective.

Financial soundness is also a vital element. This is because the mid to long-term financial landscape has become uncertain due to the national debt rising substantially, problems associated with supporting the rapidly aging population, weakening state-owned companies and the need to strengthen government reserves to pay for national reunification costs.

However, Korea must be careful to avoid damaging the country’s economic growth with excessive tightening measures. Strengthening the domestic financial sector is just as important. And as the movement of the exchange rate is heavily dependent on the inbound and outbound flow of foreign capital, Korea must establish a system in preparation for future risk factors.

Second is to discover new markets. In order to overcome the decline in global consumption, Korea must gain footholds in the “Next China” markets that have huge growth potential. Free trade agreements are an important element in discovering new markets. In order to increase the utilization rate of FTAs and minimize the side effects, conflicts arising between industries that will benefit from the trade pacts and those that will suffer need to be controlled. Finally, easing social tensions is another important task. Due to the widening economic gap between the haves and the have-nots in Korean society because of the global financial crisis, social conflict and overall discontent are increasingly surfacing. To prevent social conflicts from impeding economic recovery, the government, companies and citizens alike need to join forces to achieve continuous mutual prosperity.

*The writer is a research fellow at Samsung Economic Research Institute.

By Shin Chang-mock