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A long winter coming

Feb 14,2019
이미지뷰
이미지뷰
Kim Dong-won
The author is a visiting professor of economics at Korea University.

History suggests a downturn is “somewhere over the horizon,” warned David Lipton, the first deputy managing director of the International Monetary Fund (IMF), in a Jan. 17 IMF website posting.

The economist, who has held the senior position at the global lender since 2011, advised governments “shore up their defenses now” as the economy faces a number of complex challenges, including technological changes, lingering problems from the 2008-09 financial crisis and globalization.

As other challenges — including trade friction, climate change and refugees — increasingly pose new threats to the global economy, developments could ”fragment the international order that has governed the global economy over the last 40 years,” he warned.

Public policies have become more uncertain as populism has swept the globe in recent years. As government policy options — monetary and fiscal — as well as public financial resources have become more “constrained” than in the past, they alone are not sufficient to keep a “garden-variety recession” from becoming another “full-blown systematic crisis.”

Last October, the IMF lowered the growth outlook for the global economy for this year to 3.5 percent from 3.7 percent. The World Economic Forum in Davos, Switzerland, ended this year’s annual event on Jan. 25 on a gloomy note. The general opinion is that structural problems the global economy faces pose a greater risk than a cyclical downturn.

The outlook is even worse for Korea. The IMF slashed its growth forecast for the country’s economy by 0.1 percentage point to 2.6 percent. The structural challenges in the global context will make matters worse for trade-reliant Korea, demanding urgent action to strengthen competitiveness.

In the long-term IMF outlook for 2018-23, China’s growth was estimated to fall to 5.6 percent from 6.6 percent, that of the United states to 1.4 percent from 2.9 percent, Japan’s to 0.3 percent from 1.1 percent, and the European Union’s to 1.6 percent from 2.2 percent. Since these major markets accounted for 54 percent of South Korean exports last year, Korea could see reduced overseas demand at least until 2023. Even when the IMF stretches its outlook to 2029, recovery may not come any sooner. In short, the global economy is in for a lengthy winter.
There are fears the Korean economy could face a deeper recession than in the aftermath of the 1998 near-default crisis. Korea then was able to pull out of the bailout crisis after paying off foreign debt. But the looming troubles could last for a protracted period and cannot be solved through fiscal stimuli. If external trade conditions worsen, domestic demand must kick in to generate growth.

The Korean economy grew by 2.7 percent in 2018, mostly led by fiscal spending. The last time the government’s fiscal contribution to growth exceeded 0.9 percent was in 2006. Never did fiscal stimuli fuel one-third of national economic growth.

If exports remain sluggish, the government may have to spend more to sustain the economy. The Korean economy would more likely be led by fiscal policy than by income as envisioned by the Moon Jae-in administration. Such interventions can hurt fiscal integrity, which is the last resort of the Korean economy.

The Moon administration’s policy must focus on strengthening economic fundamentals through structural reforms with farsightedness against a lengthy transitional period in the global economy. If structural reforms do not start this year, the economy in the face of worsened conditions down the road will be too weak to prepare for a drawn-out slump.

The economy’s growth potential then could be wrecked beyond repair. That means Korea may fall back in the global race during the digitalized economy revolution. This year would be a turning point for the Korean economy. The times call for the government, companies and individuals to make important decisions.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Feb. 13, Page 33