The Korea Herald


[Editorial] Dire economic prospects


Published : Aug. 16, 2011 - 19:00

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Each Aug. 15, the anniversary of liberation from Japan’s colonial rule has served as an occasion for the incumbent president to grandstand. This year’s anniversary was no exception.

In his Liberation Day speech on Monday, President Lee Myung-bak enumerated the policies he has pursued for “green growth” and a “fair society.” Then he presented a grand vision for a “new model of the market economy,” in which “greedy management” is replaced by “ethical management” and the “freedom of capital” by the “responsibility of capital.”

By this evolution of the market economy in the Korean context, he meant a society in which working-class people are cared for, disparities in income and opportunity are reduced and responsibilities are shared. In the process, he said, “humanity, creativity and responsibility” are emerging as central values.

What he needs to do to turn his grand vision into a reality is build a consensus among all members of society, set up action plans and back them up with budgetary allocations. But the nation’s economic conditions are so dire that he will undoubtedly find it extremely difficult to finance his vision with his 2012 budget plan.

Instead, a rude awakening is awaiting President Lee, who is scheduled to preside over a conference of economic ministers and experts from the state-funded economic think tanks on both the global and national economies on Thursday. Few participants will offer encouraging news.

The world economy is in bad shape, with a double dip being mentioned as a near certainty. Domestic growth is losing momentum and prices are rising ― both so fast that the administration may have to revise its 2011 economic outlook again.

As President Lee mentioned in his Aug. 15 address, the greatest challenge his administration has at the moment is how to stabilize consumer prices. Nevertheless, he was grandstanding here again, instead of committing himself to any specific policy of taming inflation. He said, “Curbing price hikes is not something that can be addressed by our country alone. For this reason, I have been seeking hard to find a (global) solution to the problem for a long time.”

The Lee administration’s inflationary target is to keep this year’s consumer price index at 4 percent or below. But the average monthly index from January to July was 4.4 percent. In other words, it is necessary to push the index to a monthly average of 3.4 percent or below if the administration is to meet its target. Many economic experts believe that is impossible.

Minister of Strategy and Finance Bahk Jae-wan is far from sanguine when he mentions rising inflationary pressure. He says it is hard to control prices, given the recent flood-caused disruption in the supply of agricultural products and the looming seasonal hike in demand ahead of the Chuseok holiday next month.

Moreover, the Korean currency has been weakening since the U.S. sovereign credit rating was downgraded, adding to the inflationary pressure by raising import prices. Inflationary psychology remains strong, as the central bank kept its benchmark rate intact again at 3.25 percent earlier this month for fear of a downturn in the global economy.

Prospects for growth are not bright, either. The Lee administration has recently lowered the 2011 growth target from 5 percent to 4.5 percent. But many say even that may be too high. The problem lies with the nation’s export-generated growth, which is vulnerable to a potential double dip in the United States and the financial crisis gripping the eurozone.

According to a report from the central bank, external trade accounted for 110.1 percent of the nation’s gross domestic product during the first quarter of this year ― the highest since the last quarter of 2008. In other words, Korea is much more vulnerable to external shocks than Japan with 24.8 percent, the United States with 25.1 percent and China with 49.1 percent.

This is not to say the promotion of external trade is misguided. Instead, the administration should seek to increase domestic demand by promoting deregulation in the service industry where incentives are more effective in creating jobs. Here again, those efforts should be kept from stoking a new round of price hikes.