1997 versus 2016Provoking an economic crisis is inappropriate. The more we talk about hardships, the worse the sentiments of individuals and companies get. In this vicious cycle, a true crisis can rise. But hushing up hardships is not necessarily good, because it can mislead the reality. Sometimes, we need a cold-headed assessment, and that time has arrived now.
Let’s compare the situation to the 1997 foreign exchange crisis. At the time, problems were accumulated for years. The won has appreciated unreasonably, while the current account deficit continued. Companies were running under loans, while short-term funds were used for long-term operation. Things were okay until 1996. The economic growth rate in 1996 reached 7.2 percent. Even when the Hanbo crisis broke out in early 1997, no one expected the country will face a default at the end of that year. But the foreign exchange crisis came acutely and left enormous wounds. The country, however, recovered fast. In 1998, it recorded negative 5.7 percent growth, but the growth rate rebounded to 10.7 percent in 1999. It was a dramatic V-shape recovery.
This time, the economy is undergoing a chronic crisis. Since the 2008 global financial crisis, many experts were reminded of the foreign exchange crisis and spoke confidently that another V-shape recovery will take place. Those who were prudent said the economy will continue recession for some time, but make a U-shaped recovery. The most pessimistic opinion was the W-shaped double dips. But all the forecasts were wrong. No sign of a proper recovery was seen. An L-shaped long and slow recession is continuing for eight years.
The biggest difference from the 1997 crisis and now is the world economy. In the past, only some countries in East Asia were in crises. The foreign currency crisis hit Thailand and Indonesia in July 1997, Hong Kong and Taiwan in October and spread to Korea in November. It was not an issue of industry, but a credit crisis prompted by some foreign investors’ withdrawal of capitals.
Advanced economies were performing smoothly. That year, the United States recorded 4.5 percent growth, and Japan was doing okay. China, which was less open from now, also dodged the crisis. It was the time when the global trade grew 4 to 5 percent annually. When the won value dropped due to the foreign currency crisis, Korean products became competitive. Experts skyrocketed, and the economy was recovered instantly.
But things are different today. All the countries from around the world are having small or big problems. The United States is trapped in the global economic recession. The global trades went down 11.8 percent last year. China, Korea’s largest trading partner, also faced its first economic crisis since its reform and opening. Oil producers in the Middle East are struggling with low prices. Competitions are fierce, but there are no buyers for Korean products. Although the won value is dropping, exports are also dropping.
The domestic conditions are also bad. Companies are losing motivations. In 1997, many companies faced crises for reckless business expansions. They took high loans for expansion, and that was the trouble. Some entered the unfamiliar fields such as leisure and logistics and suffered losses. They were criticized for reckless management, but it was the time that their entrepreneur spirits were high.
Today, the companies were intimidated. They are slow in decision-making. They are falling behind in developing new growth power or prominent business models.
The government also became unhealthy. During the foreign exchange crisis, the healthy fiscal situation of the government was a strong pillar. The government carried out expansionary policies to keep the fire of the economic recovery. In 1997, the government debt was only 11.9 percent of the gross domestic product. It was so strong that it was actually strange that the country was facing a sovereign default.
But the state debt ratio to GDP went up to 22.4 percent in 2004, 30.1 percent in 2009 and 35.9 percent in 2014. This year, it is expected to reach 40 percent. It means the government’s ability to use fiscal intervention to stimulus the economy is shrinking.
The most serious problem is the situation of every individual. Household debts reached over 1,200 trillion won ($1.03 trillion). Bubbles are everywhere. The wealth gap reduced the middle class from 75 percent of the households to 65 percent over the past 20 years. Most of those who are no longer the middle class became poorer.
As it becomes harder to make ends meet, the social conflicts became worse and more complicated. In addition to the ideological and regional conflict, generational and wealth conflicts were added. The talks about being born with “gold spoons” or “dirt spoons” in the mouth revealed the essence of the latest wealth tap. Generational gap also grew worse over jobs and pension.
Economic conditions at home and abroad are not much better than that if 1997. But not many seem to think the crisis is their own. Everyone is focused on the upcoming election, and they are obsessed with their established interests and political fights. After the general election, they will rush to the presidential election. The Korean economy is in a crisis. It won’t help to make a fuss about it, but we must have the sense of urgency.
JoongAng Ilbo, Mar. 21, Page 32
*The author is an acting editor-in-chief of the JoongAng Ilbo.