A revolution is coming

Developed economies have been growing at a snail’s pace since the 2007-08 global financial meltdown and subsequent fiscal crisis in the euro zone, despite unprecedentedly loose monetary policies of ultra-low (and even negative) interest rates coupled with expansive quantitative easing. The theory of “secular stagnation” first floated in the late 1990s, referring to slow growth for a lengthy period of time (possibly for decades) due to structural factors, is now being revived. Economists and policy makers have been discussing it ever since former U.S. Treasury Secretary Larry Summers stated that secular stagnation has become a common problem in many parts of the developed world.

We must pay attention to the ramifications on policymaking based on the idea that the economy is mired in a structural slowdown. There are both demand- and supply-triggered factors behind long-term slow growth. Summers, from a Keynesian perspective, points to depression on overall demand as the primary cause. He argues that fiscal expansion through investment in social infrastructure and education — even at the risk of increasing public debt — would be more effective in addressing the problem than monetary policy actions like ultra-low interest rates and quantitative easing. He believes financial instability is the inevitable downside in combatting a long-term slowdown. He insists secular stagnation could be combated through the right policy actions.

Japan stumbled into a recession that lasted over a decade due to policy failure and a lack of strong and consistent political leadership. Korea may be walking into the same trap, and it has very similar demographics. Korea could easily become another Japan especially because of public policy failures. It is therefore important to study well how to avoid the fate of Japan.

Some Japanese economists claim the Japanese economy has lost vitality because its growth potential was undermined by a lack of innovation and inventions big enough to push productivity to a new level, as in the first and second industrial revolutions. An aging population, lethargic labor market, deteriorating education standards and income inequality also contributed to a frittering away of once-dynamic growth.

That argument loses persuasiveness if one considers the fast evolution of the so-called fourth revolution. Economists have missed forecasts about productivity boosts from technology advances many times over the last 200 years. Many experts believe the right mix of policy and a fast evolution in innovation can help fight structural setbacks and challenges.

A number of economists point out that the metrics measuring quantitative growth in gross domestic product and productivity no longer work in today’s economic conditions. They argue the economy looks worse than it actually is because the way we measure it is overly conservative. Data about GDP and productivity cannot fully reflect economic activity and consumer welfare in today’s market, where new products and services pour out from quick evolution in technology, which also brings down cost and prices. The controversy always existed, but is now heightened due to our steady progress toward the fourth revolution.

Demand-spurred economic stagnation can therefore be moderated to some extent through appropriate policy action. Although lagging innovation can lead to a structural slowdown, that does not necessarily apply in today’s conditions, considering the current pace of advances in technology. A scholar said the United States would have brought it on itself if it faces lengthy stagnation, meaning a failure in public policy was responsible for the economic harm.

But we should prepare for a stagnant world economy for the next 25 to 40 years. All industries and services will struggle to survive among fierce competition. The imminent shipping and shipbuilding restructuring, as well as reforms in four sectors — labor, public enterprises, education and finance — must be accelerated. Society should be revamped to be in tune with the age of the fourth revolution.

Translation by the Korea JoongAng Daily staff

JoongAng Ilbo, May 18, Page 28

*The author, a former finance minister, is an adviser to the JoongAng Ilbo.

SaKong Il