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Labor reform, corporate restructuring key to preventing new financial crisis

Labor reform, corporate restructuring key to preventing new financial crisis

Posted September. 24, 2015 07:22,   

한국어

With emerging economies seeing their currencies` value plummeting, there are projections in the global financial market that some economies are facing an imminent foreign exchange crisis. On Tuesday, the values of the Malaysian ringgit and Indonesian rupiah plunged close to the lowest during the Asian financial crisis that started with the sharp decline of Thai baht and engulfed Southeast Asia and South Korea in the late 1990s. The Brazilian real and the South African rand also tumbled to their lowest ever. Indices indicating the risk of the emerging economies` bankruptcies are surging day after day.

The biggest destabilizing factor for the emerging economies is concerns over the Chinese economy, the world`s largest emerging economy. Christine Lagarde, managing director for the International Monetary Fund, said Tuesday that the impact of China`s economic slowdown on the global economy is bigger than previously anticipated. Her diagnosis was in contrast with Chinese President Xi Jinping`s expression of confidence during his state visit to the United States. He said that the Chinese stock market has now reached a phase of self-recovery and self-adjustment. According to the Chinese government on Wednesday, the country`s September manufacturing activity index fell to 47.0, its lowest since March 2009, underperforming market expectation and sending Asian stock prices plummeting.

South Korea also saw its main stock price index fall by 37 points on Wednesday, with the won-dollar exchange declining by 12 won (the won`s value depreciated). It can be said that South Korea has yet to see any serious warning sign in terms of the currency value or state bankruptcy index. It is in a better situation than other emerging economies, as it has continued current-account surpluses and sufficient foreign exchange reserves despite slumping domestic consumption and exports.

Considering the country`s high vulnerability to external factors, it could end up paying huge prices for ignoring or underestimating signs of crisis from abroad. There are ominous signs such as the rapidly rising corporate indebtedness and increasing numbers of "zombie businesses" that are unable to pay interest on loans with their operating profits.

The procrastinated delays in labor and financial reforms and the improper treatment of insolvent Kia Motors before the 1997 financial crisis had spread skepticisms among foreign investors over Seoul`s capabilities for reforms. South Korea should never forget the painful lessons. Together with efforts to improve economic indices such as growth, investment, consumption and exports, a sure key to preventing another financial crisis is to make achievements in labor reforms and restructuring of insolvent businesses.