Nuke Test Pressures South Korea’s Economy

There are signs for the government’s economic policy direction to change.

In a situation where the three main goals of South Korea’s economic policy, higher economic growth rate, a better current account and more stabilized price, are unlikely to be met smoothly, the announcement of North Korea’s nuclear test has added to South Korean people’s sense of anxiety about the nation’s security and economy.

In response to the escalated insecurity in the nation, government high-ranking officials came up with barrage of suggestions on October 11 to revise the nation’s macroeconomic policy and review its economic stimulus package. And now Korean people are paying close attention to the direction of future economic policy.

Deputy Prime Minister and Minister of Finance and Economy, Kwon O-kyu presented at National Assembly’s question session toward the government, which was held on the same day, and said, “Although we are unable to prepare policies by predicting the influence that North Korea’s nuclear test would have on the market, we are currently reviewing economic policy according to many possible scenarios including strong economic sanctions on North Korea by the U.S.

In addition, Vice Minister of Finance and Economy Bahk Byong-won met with this paper’s correspondent and said, “Now the government is thinking about the direction for the macroeconomic policy and it is also considering using economic stimulus package when it is deemed necessary.”

To this matter, one senior official of the Ministry of Finance and Economy said, “Possible measures for the government to consider are increasing the portion of money allocated for the first half of 2007 in the next year’s entire budget or spending more budget on social overhead capital (SOC), such as roads and railways, to revitalize the local economy, which is likely to go through a further economic downturn because of North Korea’s nuclear test.

The government is also seriously considering lowering next year’s economic growth forecast, which was put forward before North Korea has gone ahead with its nuclear test.

In its economic management plan for the second half of this year, the government forecast economic growth rates for this year and next year as 4.9 percent and 4.6 percent, respectively.

However, as private economic research institutes in Korea and other major foreign investment banks are releasing their forecast one after another that Korea’s next year economic growth rate will hover around four percent, it is expected that the government’s economic forecast for the next year to be downwardly revised by 0.5 percentage points.

Some even point out that the government has gained an “opportunity” to adjust next year’s economic forecast, which was too rosy in the first place, thanks to the North Korea’s nuclear test.

One source of a private economic research institute said on the condition of anonymity, “Before North Korea’s recent nuclear test, the overriding opinion among private economic institutes was that it would be unlikely for Korea to achieve the projected economic growth rate of 4.9 percent this year and 4.6 percent next year. For the South Korean government, North Korea’s enforcement of nuclear test may have provided excuse, just like the situation where “you are getting slapped when you were already desperate to cry.”

ddr@donga.com sanjuck@donga.com