Listen to the canary
The author is an economics professor at Korea University.
When I was working at the Asia Development Bank in 2007, I reported to the 13 East Asian deputy finance ministerial meeting that the possibility of the United States experiencing an economic crisis within a year was over 20 percent based on major financial and economic indicators, and that countries needed to prepare accordingly. During the discussion, Japan’s deputy finance minister criticized my analysis, saying that it feeds an unnecessary sense of crisis; he said that when households and corporate psychology shrinks, a crisis could come.
While his criticism was reasonable, I said that if countries with a high dependency on overseas trade ignored warnings and did not properly prepare policy responses, they could suffer the catastrophe that hit Korea in 1997. Another deputy minister asked me what the problem was if the possibility for a crisis not happening in the United States was 80 percent. I said that if the possibility of crisis remains at 20 percent it is still considerable given that crises continue to occur in these cases. And in 2008, the United States was hit by a financial crisis which spread around the world.
Dangerous signs are showing again. It may not be as serious as the crisis 10 years ago, but the possibility of the U.S. economy going through a slump is increasing. As long- and short-term Treasury bond yields are reversed, warning signs for an economic slump grow. Spending psychology and housing investment are decreasing. As the effect of tax cuts that boosted the U.S. economy this year disappears, it is forecasted that the economy could decline and hit a slump in the second half of next year due to the Fed’s benchmark rate hike and U.S.-China trade war.
Major investment banks presented reports that the possibility of the United States experiencing a slump within a year was 20 percent and 60 percent in two years. According to a survey by Duke University’s Fuqua School of Business on CFOs of major U.S. companies, 49 percent forecasted that an economic slump would begin in 2019. As many as 86 percent said that the U.S. economy would slow down in two years.
Along with concerns about a U.S. economic slump, indicators in China and Europe are worrying. China’s growth rate has slowed down with decreasing industrial production and retail sales. At a press conference on Dec. 13, European Central Bank President Mario Draghi said that the risk of an economic downturn in Europe is growing. The United States makes up 24 percent of total global production, Europe 21 percent and China 15 percent.
Korea is one of the countries sensitive to fluctuations of the global economy. Forty-three percent of its gross domestic product comes from exports. Semiconductor products make up 21 percent of total exports.
The export price of D-Ram and investments in semiconductor facilities are declining. If the cyclic weakness of semiconductors continues, sluggish exports and declining domestic demand will hinder economic growth. When you consider such structural issues as our aging population, a slump in key industries and youth unemployment, the future is uncertain.
In the past, miners used to bring a canary when they entered mines. Canaries are more sensitive to harmful gases that are odorless and colorless than humans. They sent many danger signals to the Korean economy. Some experts pointed out adverse effects of the government’s income-led growth and populist policies. They argued that Korea could experience the prolonged slump Japan had suffered unless it achieved structural reforms and technological innovation.
Former Deputy Prime Minister for the Economy Kim Dong-yeon expressed concerns about the rapid minimum wage hikes’ negative impact on employment and income. But the Blue House and the ruling party criticized that a top government official called the policy a failure. They did not listen to the comments. Those who criticized the Moon Jae-in administration’s economic policy were considered conservative scholars and media that tried to find fault with the administration’s ethics. Meanwhile, employment and investment kept declining.
The president has said that the pace of implementing controversial policies will be adjusted. He vowed to reinforce our economic vitality. Regrettably, the administration wasted the past two years in relatively better conditions. It is fortunate that policies with less desirable effects are finally being scrapped or modified.
The Blue House and the government should focus on regulatory reform, nurturing innovative industries, financial reform and creation of quality jobs.
While preparing for possible global economic recession, Korea needs to pursue growth and improved distribution. Rather than excessively rely on the government, citizens must also prepare for the canary’s warning.
Translation by the Korea JoongAng Daily.
JoongAng Ibo, Dec. 20, Page 31