Report: Extended Recession Possible

In a recent report, Hyundai Research Institute said that Korea’s economy has lost vitality and lapsed into a structural low economic growth era. In addition, the institute warned that unless the government tackles the situation effectively, Korea’s economy would slip into a serious economic crisis.

The Hyundai Research Institute published a report titled, “The Korean Economy, Losing its Growth Vitality” on August 13. According to the report, “Since 2003, the Korean economy has been recording lukewarm growth rate lower than the world average, and the causes of the sluggish economy are not temporary but a structural vicious cycle.”

No vitality-

The report warns, “If the government mistakes the current economic situation in Korea as a temporary recession and does not come up with substantial measures to address the problem, Korea’s economy could experience a serious downturn.”

The report shows that Korea’s economy boasted a high economic growth, higher than that of the world’s average in 2000-2002, right after the foreign exchange crisis, despite the shock of the bubble bust in the global IT industry.

However, during 2003 to 2005, Korea’s annual economic growth, which stands at 3.1-4.0 percent, was far behind the world average economic growth, which was 4.1-5.3 percent.

Korea’s annual economic growth was 3.9 percent on average in 2003-2005 while that of Taiwan’s stood at 4.5 percent, Singapore at 6.0 percent, and Hong Kong at 6.4 percent. This shows that Korea’s economic growth was far behind those of its East Asian competitors.

Urgent need for deregulation and capital market stimulation-

Structural problems in Korea’s economy are low consumer confidence and loss of consumption base due to skyrocketing overseas spending, the report said.

Other structural issues are shrinking growth potential resulting from lack of long-term capital investment, diminishing export profitability, and growing income disparity.

Also, the IT industry, which showed dramatic growth in the past, has become stagnant and the vicious cycle in the financial market cast a cloud over the nation’s economy.

In order to break away from the low growth structure, the government should take lead in abolishing corporate regulations and creating a business-friendly environment, the report emphasizes.

In addition, the government should give hopes to entrepreneurs to encourage investment and at the same time, stimulate the capital market so that companies can easily secure funds from the stock market.

The report also suggested expanding FTAs, promoting export of higher-value added products, and fostering new growth engine industries for post-IT era as measures to strengthen the economic structure.

Chu Won, a researcher at Hyundai Research Institute, says, “The government should not stick to the temporary economic indicators, but instead, should recognize the fact that Korea’s economy has stepped into a long-term low economic growth era.”

buddy@donga.com