Ready for the quantum jumpAnnouncing her economic outlook and policy directions for 2014, President Park Geun-hye implored the nation to achieve a “quantum jump” to realize another economic miracle like the one that pulled us out of poverty. She suggested that she won’t settle for a mere recovery but is intent on a leapfrogging of the economy. The government backed her ambitious words by pledging to deliver an economy enlivened by enlightened policies. If the government is correct, the Korean economy will grow at 3.9 percent in 2014, adding 450,000 new jobs. If the forecast comes true, the Korean economy will outpace global economic growth of 3.6 percent estimated by the International Monetary Fund. The country may not have made the quantum leap that the president is hoping for, but nevertheless it will free itself from the torpors of a prolonged slump.
Signs of global economic recovery suggest that the Korean goal may not be too far-fetched. The United States posted incredible growth of 4.1 percent in the third quarter after its years of unprecedented monetary easing paid off. The United States will begin winding down its quantitative easing by reducing bond buybacks starting this month, but overall global demand will be helped if the world’s largest economy maintains a robust growth pace. Despite the so-called tapering, American monetary authorities will keep pumping out ample liquidity. The tapering is more of a message that the U.S. economy is on a stable rebound. It is not a shift to a tightening of monetary policy, and the markets seem to understand that.
Led by Germany and the United Kingdom, the euro zone shows signs of rebounding as well. Japan’s unprecedented monetary and fiscal stimuli will also continue to support the world’s third-largest economy for at least the next year. China and other emerging economies are looking pretty stable after soft landings. Jittery signs can still be seen, but the overall outlook for the global economy looks upbeat for the first time in many years. This is good news for export-oriented Korea. The Korean government has become optimistic because of these positive external signs.
But there is a catch in the overall upbeat tone. The president and government avoided articulating the word “growth” even as they cited a growth target. Instead of referring to a leap in economic growth, the president chose the phrase “quantum jump.” The government said it will focus on revitalizing the economy instead of promoting growth. “Growth” has become a taboo word for the incumbent administration. The government may have wanted to differentiate itself from other past conservative governments, including the Lee Myung-bak administration, which overly stressed growth.
The government also may be admitting that past growth-oriented policies no longer work in today’s world. Former U.S. Treasury Secretary Larry Summers gave an impressive speech at an IMF forum in November last year warning of signs of secular stagnation - in which the economy fails to grow despite ultra-loose monetary policies amid falling prices and sluggish employment. Under the status quo, the big economies could not rely on normal market mechanisms and conventional stimuli to assure full employment and strong growth. If artificial stimuli only create bubbles instead of stable growth, it may be better to give up on growth altogether and concentrate on evening out distribution and wealth. If the government believes the prescription fits the local economy, its reluctance to emphasize growth is understandable.
But has the Korean economy really reached its structural limits? Is it really beyond recovery through policy actions? Can the government call 3.9 percent growth a “quantum jump”? Summers pointed out that state actions so far only artificially inflated bubbles because they failed to beef up demand through productive investment and value-added consumption. Then can growth return to normal if asset bubbles are squeezed out?
Regardless of the theory of Summers, many studies say the Korean economy in the mid and longer terms is losing its potential to grow. The Korean Development Institute predicted the country’s growth potential will slow to 1.9 percent in 2031-40 from an estimated 3.8 percent until 2020. The Organization for Economic Cooperation and Development estimated the country’s growth potential at 2.7 from 2011 to 2030 and 1.0 percent from then on. If their forecasts are right, Korea will be stuck as a middle-income country.
But growth potential can be changed. The figure refers to the economy’s potential to grow without triggering inflation. It is calculated based on capital, labor and productivity. But economic activities cannot be totally envisioned by computerized numeric calculations. Even with the same capital and labor input, the output could be entirely different depending on variants of the human will, creativity and constructive policies.
Growth potential is not fixed. It should be a motivation, a goal, something to overcome. If we set an ambitious growth target and focus on the right policies, our growth potential could increase. The government should map out a long-term vision. To leap forward, we must set a direction first.
*The author is an editorial writer of the JoongAng Ilbo.
by Kim Jong-soo