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Slowing Korea should take all possible options

Posted May. 25, 2016 07:37,   

Updated May. 25, 2016 07:43

한국어

In the “2016 H1 Economic Forecast” released on Tuesday, the Korea Development Institute has cut the economic growth forecast from last year’s 3.0 percent to 2.6 percent. It is 0.6 percentage point lower than the global growth of 3.2 percent announced by the International Monetary Fund. It warned that Korea’s economic growth could fall further if uncertainty increases due to the delay of the restructuring of failing companies or the negative impact increase due to a massive unemployment.

As the rationale for the downward change of the economic forecast, the KDI mentioned sluggish exports, production in manufacturing and weak investments due to the global economic downturn as well as weak domestic consumption. It is true that the global economy is in trouble particularly around emerging economies that are Korea’s key export destinations such as China, Brazil and Russia, but the U.S. and European economies are relatively doing well. Instead of blaming the global economy, the research institute should have pinpointed the fundamental and structural problem of the Korean economy – the decline in the competitiveness of Korea’s export items, .

As the KDI cuts the growth forecast to the mid to high two percent following the Bank of Korea, the IMF, and the Organization for Economic Cooperation and Development (OECD), the government, whose growth forecast was 3.1 percent, is likely to revise its forecast in the announcement for the economic policy direction for the second half of the year. The Hyundai Research Institute has named Korea’s recent downturn as a “swamp” type that has no more hope in the future.

The KDI’s solutions are restructuring of failing companies, increasing growth potential, and active financial and monetary policies for job creation. The think-tank has warned that unless failing companies that cannot cover interests on loans with operating profit are swept away, Korea will face a long term recession. The government should seriously reflect on why the KDI asked for restructuring again,

Deputy Prime Minister Yoo Il-ho implied that the government could consider a supplementary budget to secure financial sources for restructuring. However, it is confusing to hear that the Ministry of Finance and Strategy does not consider a supplementary budget this year and will increase next year’s budget substantially. As a supplementary budget could increase sovereign debts, it is right to take a careful approach to it. Yet, we need to consider all options available at a time when the recession gets more serious day by day. An active financial and monetary policy could be a stop gap measure with distinct limitations. Rather, an immediate enforcement of the negative list scheme in the service sector could be a more powerful measure to revive the economy than enforcing a minor supplementary budget, as President Park Geun-hye stressed.



권순활논설위원 shkwon@donga.com