Consensus on growth forecast neededAs the National Assembly passed the impeachment of the president, political uncertainty has somewhat decreased. Now, we need to take care of the sluggish economy. Since the economic growth rate fell to 2.3 percent in 2012, it has remained at the 2 percent level except for 3.3 percent in 2014. Growth is expected to fall to as low as 2 percent next year, and the economy is expected to be trapped in low growth for six consecutive years, the longest streak in history. The average operation rate of the manufacturing sector in October was 70.3 percent, close to 69.8 percent in 1998 right after the foreign currency crisis. It is the lowest in 18 years.
The economy was hurt by the shocks of the 1997 foreign currency crisis and 2008 global financial crisis but recovered quickly. But now, the economy has lost vitality and dynamics even when there weren’t major shocks. The latest swamp-like crisis may not seem desperate as it does not pose an immediate threat of sovereign default, but it may be a more serious problem as it could be irreversible in a long run.
The swamp-like crisis is illustrated in the fall of potential growth rate. Until the early 2000s, the potential growth rate was 4.7 percent, but it has fallen to 2.7 percent. At this rate, it could fall to 1.8 percent in ten years.
Is there a solution? There is no shortcut to get out of the swamp. In the short term, the uncertainty in the transitional period should be minimized. Regardless of political interests, politicians should share a sense of crisis and establish a solid command of the economy. The government should deliver a clear messages on pending issues domestically and internationally and meticulously manage the crisis.
Fundamental solutions will take time and be painful, but long-term policies to improve potential growth rate should be established and consistently carried out. The core of productivity improvement is human capital and technological capacity. They cannot be resolved with quantitative input. They are impossible without drastic improvement of regulation and incentive structure, including evaluation system. Moreover, we must keep in mind that the importance of social consensus has increased for the enhancement of the potential growth rate.