[Editorial] Korean Economy Teetering on a Cliff

The economy in last year’s fourth quarter contracted 3.4 percent year-on-year and 5.6 percent from the third, its first negative growth since 1998 in the wake of the Asian financial crisis. Export and manufacturing growth tumbled to record-low levels, while consumer spending and facility investment fell to their lowest point in a decade.

Negative growth means that the size of the Korean economy has contracted from that of the year before. The weak won, coupled with the shrinking economy, has sent per capita income down to the level of 18,000 U.S. dollars last year. Thus, Korea has fallen from average income of 20,000 dollars just a year after it hit that mark.

The Bank of Korea had predicted 40 days ago minus growth of 1.6 percent in the fourth quarter from the third. Yesterday, the bank announced a figure of minus 5.6 percent for the quarter, demonstrating that short-term predictions are largely inaccurate. Considering this situation, how big will the discrepancy be between this year’s growth target and actual growth?

What is clear is the reason for the fall in growth: a sharp decline in exports resulting from the global economic crisis in major markets such as the United States, Europe and China. The downturn is also worsening faster than expected. Amid the contracting global economy, Korea, which heavily depends on exports for growth, cannot sustain its economic expansion. Nevertheless, it is problematic that the government inaccurately forecast a gradual decline in growth and thus took a passive stance in tackling the slumping economy. It pledged “drastic and preemptive” countermeasures, but the pledge proved to be simple rhetoric. Economic players felt no impact.

No signs say the economy will bottom out this year. Recovery in this year’s second half is possible only when pump-priming measures generate results as intended. Companies are reluctant to invest again this year after last year. The economy is feared to remain saddled in a vicious cycle of falling income leading to lower consumer spending, deteriorating business performance of companies that focus on domestic sales, and sluggish investments.

The government is putting forward a flurry of policy measures. The majority of them, however, are projects not slated for implementation in the near future, while others have been announced repeatedly. Short-term measures have proven ineffective and failed to generate the expected effects. The 20 trillion won (14.5 billion U.S. dollars) the Bank of Korea has injected into the market since mid-September last year has not flowed into companies, and instead have returned to the central bank. As a result, companies continue to suffer from a severe credit crunch.

For Korea to revitalize its teetering economy, the government, which possesses policy measures including fiscal and financial policies, must become highly vigilant before other economic players. What good is setting up a “war room” inside the underground bunker of the presidential office? The government should stop such superficial displays of showmanship and devise practical measures that can boost the economy and accelerate industrial reform. More importantly, it must push for them responsibly and aggressively.