Deregulation and reform matter

The World Bank has raised the alarm that the “danger of stagflation is considerable” and shaved its global growth outlook to 2.9 percent from 4.1 percent in the last report in January. At that estimate, the global economy would be running at a pace halved from last year’s 5.7 percent. The bank has warned of low growth and high inflation as in the aftermath of the oil shock in the 1970s.

The signs already show with the Korean economy. According to finalized figures released by the Bank of Korea on Wednesday, the GDP in the first quarter rose 0.6 percent, revised down from 0.7 percent estimated in April. Economic conditions had been worse than what the central bank estimated. The consumer price index last month soared 5.4 percent from the same period a year ago, the steepest increase in nearly 14 years.

The global lender warned of the possibility of a financial crisis breaking out in some emerging economies. It found similarities in the current economic conditions with the 1970s rocked by the oil shock, as prices have surged from a supply bottleneck and emerging and developing countries have become vulnerable. The World Bank says the surge in raw materials from the Russian invasion of Ukraine and the fast monetary tightening by the U.S. and others could hit harder on emerging economies than the developed category. Stagflation from outside factors can be trickier to cope with than the common recession. Korea must be extra vigilant as it had endured the liquidity crisis and international bailout in the late 1990s. Even if the current situation does not develop into a currency crisis, ripples from a global economic downturn could be harsh on the external-reliant Korean economy.

The government will soon release its economic policy direction for the second half. It also represents the first economic policy road map from the Yoon Suk-yeol administration. Yoon has observed that an economic crisis-like typhoon has arrived in the Korean backyard. Such urgency must be reflected in the policy outline. Stimuli through spending increases and low interest rates is no longer possible because fiscal expansion is difficult due to the government’s excessive debt ratio.

In the short-term, people’s livelihood from price surges must be eased. In the longer run, the economy must regain growth. The Korean economy is at the crossroads of falling into a lengthy slump like Japan or overhauling its economic structure for a new leap. The key lies with the private sector and its competitiveness and vitality. The government must do away with regulations to provide favorable conditions for business activity.