Avoiding Japan’s lost 20 years
The winter of 1998 was very cold. Students who entered college in 1994 were graduating. Korea had to receive a bailout package from the International Monetary Fund (IMF). Nearly two million people lost jobs. The new graduates were in trouble as well. Many companies canceled recruiting for new hires. Some were notified that they were not being hired after several months of interning. At farewell dinners, they were comforted that they would be hired in the following year when things improved.
The foreign currency crisis is considered the biggest incident since the 1950-53 Korean War, and 20 years have already passed. While there were more than a few causes, most agree it could have been prevented. Various reforms devised to avoid the catastrophe were halted in the National Assembly amid political strife. The international financial community censured Korea for too much talk and no action.
Recently, the same criticism has arisen again. “There are many discussions, but they don’t lead to compromises and agreements, and new reform measures cannot be introduced,” says Lee Chang-yong, the IMF director for Asia and the Pacific.
If we don’t reform ourselves, we will meet the tragic fate of being reformed by others. The IMF crisis was such a case. In order to refill the foreign currency reserve, Korea had to follow the reform schedule by the IMF. In the process, Koreans had to deal with insolvency and mass unemployment.
Not many predict the Korean economy will be hit with another foreign currency crisis. But this time, Korea may emulate Japan’s “lost two decades.”
Prolonged economic slumps happen for a reason. Changes in the economic environment may be the tinderbox, but the cause can be found elsewhere. Structural reform to break through the slump has failed. In the meantime, people lose motivation, and the economy loses vitality. That’s what happened to Japan. When the bubbles burst in the 1990s, Japanese authorities focused on short-term boosts rather than reform.
It is an ominous sign that the Korean economy’s growth was a mere 2.6 percent last year. The shadows of prolonged slump that haunted Japan are hovering over Korea. The growth rate has been below the growth potential for several years now, and the growth potential is falling. The IMF says Korea’s growth potential has fallen to the low-3 percent level.
The IMF bailout is an old story for the young people today. But they are faced with the same unemployment problem. One in 10 young people are jobless.
The message of Japan’s lost two decades is that an economy will be faced with a long-term recession unless it accomplishes reform. We need to learn from Japan’s mistakes. Korean society is at the crossroads of reform or recession.
The author is the New York correspondent for the JoongAng Ilbo.
JoongAng Ilbo, Feb. 2, Page 30
by LEE SANG-RYEOL