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[Comments on Economy] It Is Time to Encourage Consumption by Lowering the Interest Rates

[Comments on Economy] It Is Time to Encourage Consumption by Lowering the Interest Rates

Posted June. 18, 2001 08:03,   


Half a year has already passed. Many were concerned in the early this year that the national economy would face another economic crisis due to the slow-down of the economy in the developed countries, including the U.S. and the national economic stagnation. This was the dominating view since most of the economic agents could not overcome the 1998 nightmare.

However, despite the disadvantageous conditions of the nation and abroad, the Korean economy seems to achieve about 4 percent of growth rate during the first half of the year. Although it has slowed down compared with the 8 percent of high growth rate of the last year, the Korean economy has kept the stabilization unlike the earlier economic forecast. When it is compared with the fall of the economic growth rate of Japan and Taiwan, two major competing countries in the region, the counter-competence of the domestic economic agents to handle the outside-impact has clearly improved.

During the second restructuring process, the government resolved the unrest of the financial market by quickly taking over the matured debt of the troubled companies, and respected the market function by appropriately adjusting the devaluation of yen, which was intended for the recovery of Japan’s economy, to the won. Also, despite the difficult conditions, major Korean companies have established a ground for profit through the development of the technology and the reform of the management that can maintain the regular management activities to survive the competition with other companies. Thanks to these endeavors, the national economy has reached a lowest point in the small cycle of the economy.

However, it is anticipated that the Korean economy will not recover in full range or it will rebound in a small scale recording about 5 percent of the growth rate during the second half of the year. This is due to the absence of the inducement for the economic recovery during the second half of the year. Exports will not break from the minus growth in terms of the amount of money due to the delay of the recovery of the IT industry in the U.S. and the price decline of the semiconductor. Investment cannot lead the economic recovery in a situation where the profits of companies are worsening and the rate of operation is still sufficient. Moreover, most companies are situated in difficult positions to unfold the aggressive management because the capital market has not functioned properly since last year and the excessive regulations exist in the overall areas of finance and the management.

If this is the case, the only alternative to maintain the national economic growth and to accelerate the recovery speed is the expansion of the domestic demands centering the expansion of consumption. In terms of the business item, the traditional manufacturing industry and the service industry should grow rather than IT industry during the second half of the year. Fortunately, the consumer attitude index has been growing during the first half of the year along with the growth of the service industry. However, the number of households that plan to reduce the expenditure under the pessimistic view on the future is exceeding the number of households that plan to expand the family budget. Furthermore, the rate of growth contribution in the traditional manufacturing industry and the service industry marked under 30 percent. In short, the national economy, having lost a driving force, remains stationary. Therefore, the government should focus on the improvement of the domestic demands through the recovery of the capital market function to revive the economy during the second half of the year.

In order to achieve this, first, the government should recover the function of the financial market by reducing the risk of market through the early handling of the companies, which are subject to the restructuring. Along with this, the government should take into consideration the additional lowering of the interest rates to settle down the system of the good-cycle of the capital market. It is expected that the quick restructuring and the lowering of the interest rates will activate the financial market, especially stock market, and will stimulate the consumption.

Second, the policy of the expenditure expansion should be used appropriately without harming the financial balance when the economic support is unavoidable due to the continuing economic stagnation.

Lastly, it is necessary to ease the unreasonable regulations to activate the weak investment. Reasonable expansion of investment in the appropriate level to secure the competitiveness and the opportunities is crucial in this situation where the supply has minimized due to the insolvency of the large companies since the foreign exchange crisis. Therefore, while alleviating the regulations, such as the regulation on the observance of the debt interest rates, which restrict the investment activities, it is necessary to adjust realistically the speed of the reform policies on the finance as well as companies which have been carried out since the foreign exchange crisis. Through these, the Korean economy can accomplish the economic recovery initiated by the domestic economy, experienced in 1998, during the second half of the year.

Jung Moon-Gun (Samsung Economy Institute)