Weathering the gloom

Warning of additional uncertainty from the British vote to leave the European Union, the International Monetary Fund recently cut its global economy outlook for this year following a downgrade in April. The pace in U.S. economic recovery has been disappointing and the Brexit vote implied “a substantial increase in economic, political and institutional uncertainty,” it said.

Despite the slowdown in China, the world’s second largest economy, other emerging and developing economies fortunately have managed to grow, helping to mitigate damage to the overall global economic growth.

The global economy is expected to manage growth of slightly over 3 percent next year — a decade after the outbreak of the Wall Street-triggered financial crisis — failing to recover the pre-crisis five-year average growth pace of over 5 percent. Central banks of major economies have looked beyond textbooks to employ nonconventional monetary means of quantitative easing on top of pushing interest rates to zero percent and below, but fell short of pulling their economies out of the rut.

Some experts have warned of secular stagnation, which could be long-lasting due to various structural weaknesses that were last raised during the Great Depression in the 1930s.

Other uncertainties add gloom to the global economic prospects. Politics in the United States and many other advanced economies have been dominated by populist, nationalist, protectionist or isolationist platforms.

U.S. Republican nominee Donald Trump vowed in his campaign to exit the World Trade Organization and renegotiate or end various free trade agreements, including the bilateral FTA with South Korea. He even talked about a unilateral adjusting of the terms for U.S. Treasuries for debt holders.

One columnist claimed what Trump was out to do was to create “a new world disorder” instead of new world order, which would not be an exaggeration. But since the populist wave has caught up, Washington is expected to get tougher on the trade front to protect domestic jobs and industries for political purposes even if Democratic candidate Hillary Clinton gets elected. The disgruntlement of the working class, which spilled over after years of rapid globalization and technology advances, won’t easily subside. The nationalistic fervor in many European countries following the
Brexit vote stems from similar conditions.

But populist politics and protectionist trade policies will only aggravate and lengthen the economic stagnation, which will trigger a vicious cycle of countries turning even more self-protective. Major economies will resort to beggar-thy-neighbor currency policies.

The short- and long-term uncertainties on the global economic front present an enormous challenge for the Korean economy, which is particularly vulnerable to external shocks. Companies as well as workers will have to double their efforts to enhance their competitiveness and productivity. The role of the government becomes pivotal at such demanding times.

The government must stabilize the macroeconomic front through the management of domestic demand to compensate for the reduction of overseas demand and continue with reforms in industries, individual companies and the labor market. It must increase public spending through extra budgeting in a manageable way.

What is most desirable, though, is reinvigorating corporate investment. It must accelerate deregulations, including the restrictions on manufacturing facilities around the capital, to encourage new investment and hiring. Various regulations hindering our shift to the fourth industrial revolution must be removed.

The government should be fully aware that the timing of raising tax rates on companies is simply not right given the overall conditions and the need to stimulate corporate investment.

Before the government takes up its rightful role, it must first try to improve its efficiency in the devising and execution of public policies.

But we can hardly expect our government to plan, coordinate and execute policies with farsightedness if senior officials lack channels to meet face-to-face and cannot dare to pursue bold measures in fear of facing grilling at regular parliamentary questioning sessions.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Oct. 19, Page 28

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

SaKong Il