Perfect storm on the horizon

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Perfect storm on the horizon

The Korean economy is at a crossroads. Warning signs are everywhere. Exports and domestic demand — two pillars of our economy — are sagging just as the unemployment rate soars to a dangerous level. Snowballing household debt, an offshoot of low interest rates and the government’s stimulation of the real estate market, is a time bomb.

To make matters worse, the weakening competitiveness of our major companies — as seen in the unprecedented failure of the Samsung Galaxy Note7 and recalls of Hyundai cars — rings loud alarm bells. Strikes by well-paid workers of Hyundai Motor make the situation even worse. Our economy will most likely see its growth plunge to the one percent range in the fourth quarter.

As the shocks are expected to continue throughout 2017, the Bank of Korea has hurriedly frozen the benchmark interest rate and lowered next year’s growth target to a mere 2.8 percent.

Crises in our mainstay industries will have massive repercussions across the board. Samsung and Hyundai will only see their profits fall, and their countless contractors face bankruptcy. McKinsey & Company predicted that embattled Daewoo Shipbuilding and Marine Engineering cannot survive on its own.

A perilous slump has hit our shipping, shipbuilding, steel-making, petrochemicals, semiconductors and automobile industries. As a result, the number of unemployed for a long term (more than six months) set a new record since the 1997-98 foreign exchange crisis, with youth joblessness skyrocketing to 9.4 percent. After the U.S. Federal Reserve’s decision to raise interest rates within this year, our government’s rejuvenation of the real estate market to stimulate the economy has hit a snag. If it fails to address the 1,300 trillion won ($1,143 billion) household debt, our economy will face unimaginable ramifications.

A “perfect storm” awaits the economy. Yet the government seems to be sanguine thanks to relatively stable indicators in foreign-exchange reserves and sovereign credit rating. That eerily reminds us of our bureaucrats’ complacent reaction shortly before the 1997 crisis.

Neither fiscal stimuli nor monetary easing can save the economy. The answer lies in structural reform and “creative destruction,” as defined by Joseph Schumpeter decades ago. Only new products, new technology and new markets can win in the game. The government has to be the first-mover so that entrepreneurs roll up their sleeves. It is time to prepare a contingency plan.

JoongAng Ilbo, Oct. 14, Page 34
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