The challenges on our horizon

An economy runs on a long-term business cycle of downward and upward movements. Companies increase investment and output when the economy is on an upward trend. When inventories build up to overcapacity, the economic cycle changes its direction. When production costs and prices fall and inventory thins out, business again picks up. If interest rates are low, money flows into real estate or stocks. This can inflate asset values and create steeper curves in expansion and contraction, a typical case of a boom-and-bust cycle.

The global economy has been in a lengthy stagnation. Seven years have passed since the world grappled with a global financial meltdown in 2008. Yet the economy is still lethargic and fragile. Skeptics, including former U.S. Treasury Secretary Lawrence Summers, believe advanced economies may be mired in structural stagnation due to subdued effective demand and a slowdown in new technology developments. The Chinese economy is showing signs of a harsher-than-expected slowdown, which adds to the global gloom. Beijing estimates its economy grew about 7 percent in the first half, but overseas institutions believe a number between 4 percent and 5 percent is closer to reality.

The export-reliant Korean economy is in a bind due to negative external factors. Exports have been falling steeply. Domestic demand is recovering at a snail’s pace despite fiscal and monetary stimuli. This year’s growth is expected to be only 2 percent, the lowest since 2009. Everyday lives are worse than the data shows.

Salary-earners and shop-owners struggle to make ends meet. Family gatherings over the long Chuseok holiday were weighed down by gloomy topics about job insecurity and marriage and education costs.

The local economic prospects are darkened by the structural problems of an aging society and productivity loss that eat into long-term growth potential. The Korea Development Institute raised warning about similarities between Korea’s economy and Japan’s.

Not everything is bad on the external front. The U.S. economy is recovering. The Chinese economy is under foggy prospects, but most experts believe it could avert a hard landing if Beijing authorities navigate well. Apart from the aging phenomenon, Korea’s situation differs greatly from Japan two decades ago. Japan sank into a slump that lasted over 20 years because of various complications - a real estate bubble burst, slow financial reform, atrophied productivity, surge in national debt and repeated policy follies. We won’t likely go down the same ill-fated path.

Korea faced many economic challenges and upheavals but somehow survived them. During the early industrialization stage, the government, companies and workers were united in their will to combat post-war poverty and rebuild the nation. The economy rose to a new level when the entire population pulled together after national income fell nearly 7 percent, 776 financial institutions shut down and thousands of people lost jobs in the wake of the 1998 financial crisis. When the global economy was swept up in a collective financial crisis in 2008, policy makers and business owners were fast in pre-emptive restructuring and policy actions, making the economy the most resilient in the Organization for Economic Cooperation and Development.

The country has unrivalled innate strength, in particular its zeal for education and its hard-working human resources. Industrious workers, fearless entrepreneurs and committed bureaucrats all have been faithful in their roles. Economic experts in a survey by the Joong
Ang Ilbo published in its 50th anniversary edition cited education passion and excellent human resources and agility in the face of change as the country’s biggest assets.

We must build on our strengths and improve our weaknesses. In a comparative study by the World Economic Forum, Korea lags behind advanced countries in transparency in policy-making, confidence in politicians and efficiency of its labor market. The education system isn’t good at grooming people for a creative and innovative economy.

The country’s future hinges on the younger generation and a breaking down of old ways so that people can discover and fully use their potential. Reforms must be accelerated so that systems can be retooled to better meet our economic scale and push the economy into the advanced ranks. New economic growth engines must be sought and promoted to respond to a changing environment. If there is the will, anything can be done.

Translation by the Korea JoongAng Daily staff

JoongAng Ilbo, Sept. 25, Page 34

*The author is an economics professor at Korea University.

by Lee Jong-wha