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[Viewpoint] Turbulent, uncharted economic waters

Published: 25 Jul. 2012, 19:15

The future is always hard to predict, but it becomes even more precarious during hard economic times.

South Korea finds itself headed for an extended slowdown with few signs that the situation will get better anytime soon.

In the meantime, insecurity and unrest constrain corporate and consumer spending, which further slows the economy and raises the specter of recession, which generates more anxiety about the future.

It is a vicious circle.

The trouble this time is that the ominous symptoms may be neither cyclical nor the temporary result of external shocks.

The Korean economy has weathered various challenges and risks over the years and managed to expand. It suffered setbacks from the oil shock of the 1970s, the currency crisis in 1997 and the global financial meltdown in 2008.

This time it may be different. First of all there is no velocity or vitality in the rebound from a crisis-hit economy. It has long been underachieving and is stubbornly moving further south, raising concerns that we may be looking at an unprecedented recession and entrenched slowdown.

An economy accustomed to strong growth rates is in uncharted waters. Tried and true prescriptions and solutions may be of little use.

This economy is in an entirely unfamiliar environment with a weakening global economy that spells trouble for Korean exports.

In the aftermath of the oil shock in the 1970s, a boom in overseas construction provided quick relief for the local economy.

While the country endured the Asian financial crisis in the late 1990s, other parts of the world fared well.

During the global financial crisis, governments worldwide have joined hands for concerted efforts at economic stimulation. But now the United States is mired in a slowdown while much of Europe struggles under the weight of sovereign debt crises and austerity programs. China and other emerging economies that had helped sustain global growth are also showing signs of slowing down.

Making matters worse is the lack of leadership to synchronize global efforts to confront the situation.

For the time being, Korea cannot rely on overseas demand and there is not much hope that domestic consumption can take up the slack. Households face increasing debt, falling property values and income stagnation. They have lost their appetite for spending.

With foreign and domestic demand in the dumps, the Korean economy can hardly be expected to grow. Merrill Lynch has predicted GDP will be less than 2 percent for 2012.

Estimating that GDP was less than 3 percent in the first half of the year, the Bank of Korea cut its benchmark interest rate earlier this month and the government held an emergency meeting chaired by the president to come up with plans to revive the economy.

The authorities exude a sense of of urgency and anxiety. But an effective prescription requires a correct diagnosis.

If the current slowdown is the beginning of a prolonged depression, the central bank and government need to concoct lasting and farsighted stimulus measures.

The government must completely revise its economic planning operation. Budgetary planning must focus on the reality of an economy on a downward trend.

Instead of resorting to supplementary increases, policy makers should take the long view and devise a spending plan that will enhance the potential for growth.

Instead of pumping out money to stimulate consumption, the government should accelerate deregulation to encourage private-sector innovation and recreate the domestic consumption market through the value-added service sector.

The outgoing government may grumble that it lacks the spirit and resources to come up with fundamental changes in economic policies. But because it is outgoing, the government in fact has more room and liberty to work with conviction. It can sincerely work for the economy and the future of the country free from the shackles of political calculation.

Presidential candidates from the ruling and opposition camps also should have an entirely new mindset about economic policy. The president who will be sworn in next February will inherit an economy with precarious prospects. An economy that does not generate growth cannot deliver on campaign promises of welfare benefits and job creation.

Promises to arm-twist chaebol groups and offer economic justice will be of little help or comfort to citizens battling to make ends meet.

There are no superheroes among the presidential candidates who will be able to set the economy back on a track toward stability without some suffering.

Since there is no turning back or easy way out, we all have to brace for a long battle.

* The author is an editorial writer of the JoongAng Ilbo.

by Kim Jong-soo