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Time for stimuli

Published: 07 Jul. 2014, 21:05

Koh Hyun-kohn

In the fall of 1996, South Korea was piling up deficits in its current account, running out of foreign exchange while its companies were getting deeper in debt. A year later the country would be forced to seek an international bailout to avoid bankruptcy. The government came up with a policy slogan revolving around “10 percent.” President Kim Young-sam ordered the government to come up with ways either to cut costs by 10 percent or raise efficiency by 10 percent. All throughout the second half of that year, government offices were entirely preoccupied with coming up with ideas to hone their competitiveness by 10 percent.

At the end of the year, each government office proposed its own plan to cut costs or raise efficiency. Reforms in public enterprises and deregulation were popular ideas. Other ideas included laying off 10,000 government employees within four years and deregulation and liberalization up to the standards of advanced economies.

The government congratulated itself as if it had found a magic potion. But the economy didn’t get any better. In fact, it worsened day by day. The current account deficit reached $23.1 billion at the end of 1996. Financial companies had to seek high-interest loans from overseas to make up for losses.

The following year, one company after another - both big and small - went under, starting with Hanbo and Sammi. The country could not hold up any longer and finally declared itself bankrupt in November 1997. Each day had been nerve-racking. Few had time to worry about the 10-percent plans anymore. Maybe that was a good idea for a mildly challenging era, but it proved to be way too little, way too late in the kind of emergency Korea was facing. Worrying about competitiveness in the second half of 1996 had been a disastrous approach. When a life is at immediate risk, a tumor must be removed. A change in medication or diet isn’t enough.

The Korean economy is once again facing hard times. The Sewol ferry debacle in April that took nearly 300 lives also took a heavy toll on the overall economy. A heavy pall weighed over the nation, sucking life out of consumer spending. The 1997 crisis was both abrupt and acute, but a chronic disease is trickier to cure. The Korea Development Institute downgraded its growth estimate for this year to 3.7 percent from 3.9 percent. Without some new engine of traction, the economy will likely underperform the estimates.

In the beginning of the year, the government proudly announced a three-year plan to overhaul the economy. It listed a plethora of ways to improve the fundamentals of the economy. Action plans totaled 59, including an overhaul of public enterprises, deregulation, and revitalization of the service sector.

But these structural cures take time. The question is whether the economy can keep up in the meantime. If the economy worsens, that three-year plan could meet the fate of Kim Yong-sam’s 10-percent campaign in late 1990s. It could become irrelevant.

To prevent the plan from going to a waste, the government must demonstrate a will to act on it accompanied with short-term stimuli. Many object to artificial stimuli. But the truth is that the economy cannot afford a debate on the issue. The world is way ahead of us. The U.S. Federal Reserve pumped out as much as $4.5 trillion in its quantitative easing program since 2008. The fact that it has helped the U.S. economy avoid the biggest recession since the Great Depression cannot be disputed. Jobs have increased and stock prices have hit record highs. The European Central Bank also came up with an unprecedented action of moving beyond zero interest rates by going negative. Japan has been printing money without any ceiling to stimulate lending and spending. Whether these aggressive monetary maneuvers prove to work in the long run remains to be seen. But taking a risk is better than sitting on your hands.

The Park Geun-hye administration has wasted its first full year deliberating on whether it should try to ease economic inequalities or stimulate the economy. Instead of doing everything to resuscitate a dying patient, it spent time arguing about the treatment. The Korean won alone continues to strengthen while currencies in other markets have been weakened on monetary easing policies.

The economy is in a state of shock. It needs radical action either through monetary or fiscal means. The new deputy prime minister in charge of the economy, Choi Kyung-hwan, must send a clear message to the market that his team is willing to do everything to save the economy.

JoongAng Ilbo, July 7, Page 32

*The author is deputy editor in chief of the JoongAng Ilbo and director of the Economic Research Institute of the paper.

By Koh Hyun-kohn