Deja vu all over again

Lee Jong-wha
*The author, a former chief economist at the Asian Development Bank, is a professor of economics at Korea University.

Let’s hope we’re not merely going through a déjà vu event. A decade ago, we were equally upbeat. The economy was purring along and foreign affairs were pretty good, too. In hindsight, that was the lull before the storm. And the ensuing turmoil caught us completely off guard.

Economic conditions were not bad in 2007. Gross domestic product rose 5.5 percent and inflation was 2.5 percent. Korea’s current account surplus was an impressive $11.8 billion. Per capita income exceeded $20,000 and the composite stock price index passed the 2,000 threshold for the first time.

In October 2007, President Roh Moo-hyun held summit talks with North Korean leader Kim Jong-il in Pyongyang. They agreed to put an end to the war status quo and hold a tripartite or four-way summit to draw up a peace regimen for the Korean Peninsula. They announced the creation of common fishing and development zones along the west seas and coastal regions. The world watched the inter-Korean summit as tensions were high following the North’s first nuclear test. The Korean markets were awash with foreign capital afterwards, pushing the U.S. dollar down to the 900 won level.

But an unexpected bomb exploded on Wall Street later in the year. Derivatives backed by subprime mortgages put Wall Street bankers in the red. Snowballing write-downs and losses forced Lehman Brothers to file for bankruptcy in September 2008. Financial institutions panicked and began to pull in capital from around the world. Global commerce shriveled, and the global economy entered a decade-long recession.

The export-dependent Korean economy was hit very hard. Increases in oil and raw material prices hurt. By March 2008, international oil prices hit over $100 per barrel. Inflation shot up and domestic demand slumped. In 2008, the economy grew 2.8 percent while inflation jumped 4.7 percent on year. The current-account surplus shrank to $3.2 billion. Due to flight of foreign capital, the won sank to 1,500 against the dollar. In the following year, growth was restricted to 0.7 percent.

The global economy these days is unsettled with downside risks growing. In April, the yield on 10-year Treasury notes topped 3 percent, rattling the international capital market. Currencies in emerging economies with weak fiscal situations tumbled due to massive foreign capital runs. Investors fled in fear of further depreciations. As a result, Argentina, sought relief from the International Monetary Fund.
Amid inflationary pressures, the U.S. Federal Reserve is expected to go on raising interest rates. U.S. President Donald Trump’s administration is expected to issue more debt to make up for a growing federal deficit. Treasury bond prices are bound south and their yields in the opposite direction.

Competitive protectionist actions and trade friction also pose a threat to the global economy. The United States and China failed to cut a deal to avoid a trade war by drawing concessions from Beijing to reduce its surplus in trade with the United States and subsidies to high-tech. Oil prices are on an uphill trajectory since they bottomed out at $26 per barrel in February 2016. The crude oil rate hovers above $70 amid uncertainties in oil-producing nations such as Iran and Venezuela.

For the Korean economy, the external environment may be better than a decade ago, but if interest rates and oil prices go higher, coupled with worsening trade conditions, the shock could be equally big. Governments around the world joined forces and synchronized in trade and financial actions to combat the global crisis in 2008. But such a concerted campaign is not easy today given the nationalistic agendas and power struggle between the United States and China.

The Moon Jae-in administration’s first-year report card got high grades overall, thanks to the inter-Korean breakthrough. But it scored poorly in the economic category. Youth unemployment remains at an all-time high and small and mid-size enterprises and self-employed businesses are struggling hard amid spikes in labor costs and reduced working hours. Exports led primarily by semiconductors have lost steam, falling compared to the year-ago period in April. Mainstay industries are rapidly losing competitiveness, closely chased by Chinese rivals.

The economy needs as much attention from the government as inter-Korean affairs. Fiscal, monetary, financial and trade policies must respond fast to external changes to ensure stability and uninterrupted growth in the economy.

The fundamentals of the economy should be restructured so they can better withstand external shocks. Export competitiveness must be strengthened. Companies should be encouraged to invest in future growth areas and enhanced productivity. The domestic sector must generate jobs from the high-value services sector and innovative enterprises. Even if this is a déjà vu moment, many things must pan out differently from a decade ago. We must keep our eyes wide open to ensure that we avoid going down the same ill-fated path. The government must come up with a wise strategy fast.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, May 10, Page 31