Go back to square one and draft an economic plan again

Amid the U.S. Federal Reserve’s tightening of monetary policy, the New York Stock Exchange saw stocks slide to the lowest in a year, and the Kospi also plunged to below 2,600 level, marking the lowest close in 17 months. Following the Fed’s half-point rate hike on May 4, stock exchanges in the U.S. and South Korea saw wild swings and stocks are sinking deeper. The Fed’s big step of tightening monetary policy in order to curb down inflation is setting off ripple effects that are felt across the world over time.

A sharp fall in stock prices, which is a barometer for real economy, is driven by concerns that the pressures from the global crisis do not seem to be eased any time soon. Global supply chain disruption because of COVID-19 and Russia’s invasion of Ukraine and the surge in commodity prices are bound to lead to more upward pressure on inflation, interest rate hike, strong increase of debts, and slowdown of an economic growth.

South Korea’s export-driven economy combined with weak domestic demand is mired in a dilemma. The use of fiscal policy to beef up growth may put pressures on inflation, and a sharp rise in interest rates to lower inflation may provoke a recession. Yet, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho has said to table a supplementary budget bill, which may stimulate inflationary pressure, in the first cabinet meeting of the new government. Bank of Korea Governor Lee Chang-yong said last month that the pace at which the Korean won is depreciating is not particularly rapid, but the value of won against dollar has weakened significantly since then, adding on the concerns about capital outflows. It is doubtful whether the control tower of economic policies and the head of the monetary authority are properly addressing the complicated crisis the country is facing.

The new government’s economic policies must directly face the crisis and check the fundamental of the economy. Although people in charge say the nation’s economic fundamentals are sound and strong, trade balance, which serves as the backbone of the economy, is running a 6.6-billion-dollar deficit as of 2022, and a consumer price index has also surged to the highest level in 13 years and six months. The virtuous cycle of economic growth and increasing employment has broken down long ago. The existing economic policy has been devised based on the positive expectation that the global economy is headed for a gradual recovery, which is at odds with the reality. It is time to redraw an economic plan with a focus on economic reform to replace an out of date growth engine.