June 26, 2005


Will South Korea's economy follow Japan's? (CHRISTOPHER LINGLE, 6/27/05, The Japan Times)

There are reasons to worry that the South Korean economy might emulate its Japanese counterpart and enter into a long slump. For example, South Koreans face heavy debt burdens related to the credit-card bubble that peaked in 2003 and a low rate of job creation. And there is the specter of rising consumer prices following the increase in commodity prices by 5.1 percent in April from a year earlier.

These problems are bad enough. But there are more. For example, China's attempts to rein in its overheated economy along with further expected increases in U.S. interest rates may cause South Korean export growth to falter. With its economic growth depending more heavily upon exports than Japan's, South Korea's domestic demand is even more sensitive to export income. This is all the worse given that many of South Korean exporters enjoy little pricing power.

South Korea's political leaders response to the disappointing economic growth figures have involved a series of ill-advised decisions that are likely to make matters worse. Instead of shaping policies that address structural deficiencies in the domestic economy, they have been focusing upon tweaking cyclical variables.

Recently, the government front-loaded its spending in the first half of the year, while the central bank froze its key interest rate at a record-low 3.25 percent. Such steps are misguided and likely to prove to be counterproductive. This is because the problems facing South Korea's economy are long-term and structural, and will require a considerable amount of restructuring.

While South Korea's central bank has introduced distortions into the real sector by holding interest rates down for a long time, increased government deficits have led to increased public-sector debts and a rising tax burden. Since deficit spending has such a poor record for inspiring corrective measures for cyclical downturns in economic growth, these decisions suggest that short-term political concerns are being placed ahead of long-term economic considerations.

Japan's economy faces the same structural dystopia as does South Korea's. And the application of conventional macroeconomic tools has failed spectacularly in both cases. Despite massive runups of massive public-sector deficits with an ultra-loose credit policy, Japan's economic growth remains feeble.

Completely ignoring the main problem.

Posted by Orrin Judd at June 26, 2005 11:33 PM
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