History repeating itself
The author is an editorial writer at the JoongAng Ilbo.
Many think the Korean economy is in a crisis. Heated discussions over Justice Minister Cho Kuk turned subdued when the topic shifted to the economy. Data has long been indicating trouble in the economy. Annualized growth may not even reach 2 percent this year. Korea has never performed so poorly except during the crisis periods — 5.5 percent negative growth in 1998 following the near-default crisis in 1997 and 0.7 percent growth in 2009 in the aftermath of the global financial meltdown in 2008.
As the economy has not been able to recover on its own, the government has to create jobs with public funds. Due to subdued demand and money flow, inflation has gone sub zero for the first time ever. If this is not a crisis, what is? External shocks in the past caused an immediate heart attack. This time, the sickness could go deeper and last longer.
We won’t likely run into anther liquidity crisis due to shortage of foreign exchange reserve. The government is proud of the foreign exchange reserves swelling to $400 billion. Unless the international market is wiped out, we are safe from worries of a national default. Still, the conditions in Korean society strangely resemble those ahead of the currency — and subsequent liquidity — crisis in 1997.
First of all, the ruling power is entirely oblivious to the dangers. President Moon Jae-in has confidently declared that the economy is moving in the right direction. But it can go astray if the captain cannot see the looming predicament. In 1997, authorities claimed that the country was unlike its Asian peers with currency troubles because its fundamentals were strong. Reforms and restructuring stalled under the blind optimism. The government did not act fast despite chain insolvencies of big corporate names such as Hanbo Steel, Jinro and Kia. Its inaction led to a massive foreign capital flight and a liquidity crisis.
Another similarity is political populism and union power. A lawmaker from the ruling party retracted his remarks that the Moon Jae-in administration did not side with labor unions of the big companies — just a day after his visit to the Federation of Korean Industries, an interest group for big companies. The ruling party frets more about annoying the union groups than corporate sentiment.
Things are actually worse than in 1997. The global economy is rapidly weakening due to the unrelenting trade battle between the United States and China. Trade barriers are highest since the Great Depression. All the external developments bode badly for the Korean economy relying on overseas demand. Exports have been slumping for 10 straight months and the widening losses suggest a turnaround may not come soon.
Public finance used to be stronger 20 years ago. At the time, bureaucrats voiced strong opposition against profligacy. When officials from the IMF demanded debt-financed fiscal budgeting as they laid out terms for an international bailout, Finance Ministry officials persistently refused to defend our public finance integrity. The economy could have worsened due to less aggressive fiscal actions, but Korea was able to maintain international and market confidence in its public fiscal management. The same enthusiasm is lacking in the Finance Ministry today. Debts are snowballing to finance a supersized budget. It is hard to restore fiscal integrity once it is broken.
Insecurity and skepticism are more prevalent than 20 years ago. Consumer and business sentiment have remained stubbornly in the doldrums. While capital investment has been skidding for nine straight months, overseas direct investment has been hitting all-time highs. More believe Korea has entered Japan-style stagnation.
Although it refuses to see the crisis, the government wants to revive the economy. But how can the economy be saved when companies and investors are shunning the local market?
The government must seriously reflect why Korea has lost its market and business appeal.
JoongAng Ilbo, Oct. 1, Page 27