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Structural reforms needed to avoid long-term economic depression

Structural reforms needed to avoid long-term economic depression

Posted August. 15, 2014 04:53,   


The central Bank of Korea cut its policy interest rate for the first time in 15 months by 0.25 percentage point to 2.25 percent, the lowest in three years and 10 months. The rate cut would support new Finance Minister Choi Kyung-hwan`s expansionary fiscal policy aimed at boosting the slumping economy. Although some critics express concerns that a rate cut would increase household debts, the central bank chose to communicate with the market and cooperate with the administration.

However, a rate cut and fiscal expansion are just a shot in the arm for the sluggish economy. They should be followed by industrial innovations and structural reforms so that improved economic sentiment can increase the potential for a long-term growth. Since his inauguration, the finance minister has expressed concern that the Korean economy might follow the footsteps of the Japanese economy that has remained stagnant for two decades. Japan lost two decades not because it failed to implement economy-boosting measures. In the early 1990s, Japan lowered its key rates to the rock bottom and supplied enormous amounts of money to the market in an attempt to overcome a strong yen and dwindling exports. However, such measures only created bubbles that resulted in a long tunnel of depression.

Japanese Prime Minister Shinzo Abe`s economy policy has been successful in some measures such as fiscal expansion and quantitative easing. Still, he made slow progress in another main goal for enhancing a long-term growth potential, raising skepticisms over the success of "Abe-nomics." The British daily Financial Times editorially cited structural weaknesses in the Japanese economy such as the lack of new corporate investments and the rigidity in the labor market.

The Korean economy is in a similar situation. It has long depended on large exporters such as Samsung Electronics and Hyundai Motor for economic growth. Now, their future has uncertainties. Smaller companies are not competitive enough in the international markets. As businesses are reluctant to make new investments and create jobs, there are signs that the Korean economy has entered into a structurally low growth. The finance minister has announced measures to boost the domestic services industry and expressed his commitment to reinvigorate the Korea Tripartite Commission. In order for short-term economic boosts to lead to a long-term growth, it is necessary to ease regulations, innovate the industries and reform the labor market through a tripartite compromise. Economy-boosting measures that are not followed by structural reforms would only advance the beginning of "two lost decades."