Defeatism is the enemy
The New Year has started off on a shaky note. China’s stock market crashed following weak economic data and tensions escalated in the Middle East due to a diplomatic standoff between Saudi Arabia and Iran over the execution of a Shiite cleric. Global upsets have repercussions on the local economy. The stock market received a blow when it was already gloomy about export prospects. But every year has had its difficulties since the Wall Street meltdown in 2008 and the ensuing “Great Recession.” Domestic factors such as the outbreak of Middle East respiratory syndrome (MERS) compounded problems from abroad, slowing the local economy and undermining its growth potential. The challenges for this year’s economy are basically the same as last year’s. We must somehow find a way to pull ourselves out of low motion gear and end that giant sinking feeling in terms of growth potential.
The outlook is as frustratingly poor as last year. This year’s economy could underperform last year’s estimated growth of 2.7 percent, not to mention the government’s 3.1 percent target. The government maintains that it will direct policies toward the target.
But the government never got its target right. This year’s may also be elusive. The government is not alone on missing estimates. The International Monetary Fund does more poorly. It estimated the global economy would grow 4.1 percent in 2014, but the figure turned out to be 3.0 percent. That is why its estimated growth of 3.6 percent for the global economy this year doesn’t seem that reassuring. If the global economy’s growth stops at last year’s pace of 3.1 percent instead of 3.6 percent, the local economy would grow just 2.6 percent, according to the Korea Development Institute. Even if we try hard, the economy may end up performing worse than last year.
Worse, the potential economic growth rate is sinking. The Bank of Korea last month estimated the country’s potential economic growth rate between 3.0 percent and 3.2 percent, which is lower than the estimates three years ago. Private think tanks place Korea’s potential economic growth rate at the mid-2-percent range. The Organization for Economic Cooperation and Development estimates the country’s potential economic growth rate to plunge to the 1 percent range in a decade, placing Korea in 33rd place among 34 members in terms of growth potential. It believes Korea will become like Japan with growth potential at zero percent. We must slow the fall in growth potential if we want to avoid a recession.
Solutions are out there. Productivity must be improved through structural reforms. There is no disagreement on the solution. Governments all have aimed for the same goals under different slogans. It was Vision 2030 for the Roh Moo-hyun government, Future Vision 2040 for the Lee Myung-bak government, and a mid and long-term economic development outline for the incumbent government. The problem was action. That is why we see scant progress in the reform campaign.
This year’s economic policy is as important as a mid-term goal. Unlike the undisputed goal of structural reform, people differ in opinions on near-term policy. Those who emphasize fiscal integrity oppose debt-financed growth. They are worried about further increase in fiscal debt. Many also are against further interest rate cuts in fear of further swelling of household debt. Skeptics warn of another financial crisis. Their claims are not groundless. But what we need most of all is public confidence that the economy won’t worsen. Korea has been long accustomed to the dogmatic belief that its fiscal state must be healthy and interest rates must not be too low. But if long-held dogma cannot boost public confidence, it is better to do away with it.
Korea still has ammunition left in its fiscal and monetary policy. The base rate of 1.5 percent, although a record low for Korea, is more than 1 percentage point above the policy rates in other major economies. The debt ratio that reflects our fiscal integrity is the world’s highest. The country has recorded the largest-ever trade surplus, which could bolster the Korean won. A strong won could deal a heavy blow to exports. With corporate investment depressed, the government inevitably would have to increase fiscal spending regardless of its widening debt. It needs not be too fearful of fiscal deficits.
We should learn more from China and Japan. Data points to a hard-landing for the Chinese economy. But there is confidence that the Beijing government won’t let the economy crash. There is also a strong belief among the Japanese that Prime Minister Shinzo Abe won’t yield the strong stimulus campaign dubbed Abenomics until the economy is safely on a path to recovery. We do not have such faith in our own government.
The government maintains it has done everything it could, and the economy managed to grow 2.7 percent last year. This was also possible through a supplementary budget of over 10 trillion won ($8.36 billion), government-led consumption and real estate stimuli measures. There were both downside and upside risks to the stimuli. The country’s gross domestic product rank moved up to 11th from 13th and trade volume sixth from seventh in the global rank.
But the endeavors must not lose steam. We are not demanding growth of 4 percent to 5 percent. The economy should at least run at its potential economic growth rate of 3.1 percent as the government hopes. This is important in order to fend off defeatism.
The government must inject funds to support the economy, which could shrink in the process of corporate restructurings. It also must not suddenly shift to tightening the money supply upon fragile signs of recovery. The TV drama “Reply 1988” has become a hit. It portrays poorer days, but at least there was vitality in the people’s spirits back then. Will we be as nostalgic about these days if there were to be a retro TV program “Reply 2016”? I cannot be sure.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Jan. 6, Page 28
The author, a former editorial writer of the JoongAng Ilbo, is an advertiser at the Korea Institute of Finance.
by Kim Yeong-ook