Will Korea Head Off Deflation?
By Kim Jae-kyoung
Staff Reporter
Amid growing concerns over asset deflation, a noted global economist said that Korea should transform its economy into a service-based one to weather the current difficulties and head off a Japan-style deflation.
In an e-mail interview with The Korea Times, Mauro F. Guillen, professor at the Wharton School of University of Pennsylvania, said that real estate prices in Korea have not risen as much as in Japan in the 1980s, but there is a parallel.
``What is very important is for the central bank and government to have very good information as to the solidity of the banking system,'' he said.
``If loans go into default, banks should make provisions promptly and seek capital as soon as possible. The danger is to repeat Japan's mistake, not to address risks associated with asset deflation,'' he added.
With stagflation ― a combination of rising inflation and stagnant growth ― about to touch down on the Korean peninsula, there are brewing concerns over asset deflation triggered by the burst of a massive property bubble funded by debt.
He pointed out that China and other countries have become major powerhouses and this is hurting Japan, Korea and Taiwan.
``Of the original tiger economies, only Hong Kong and Singapore have continued to do well, and that's because they've moved into services. That's what Korea must do, emphasizing high-value added services,'' he said.
Guillen, who is an expert on the Korean economy, pointed out that the root of Korea's problem with less than ideal growth rates is that it is not making the transition to a service economy fast enough.
``There's too much competition in manufacturing. Korea must liberalize and deregulate services as soon as possible,'' he said.
Regarding the government's recent intervention to stabilize the won, Guillen said that with interest in Korea already quite high, it does make sense to use other means to stabilize the won, especially given that the country holds one of the largest foreign reserves in the world.
``Korea faces an interesting set of tradeoffs. Both GDP growth and inflation rates are up, and this may cause trouble. Much of the inflation is due to a tight labor market, but also because of the weak won relative to the dollar,'' he said.
``The key is to bring down inflation quickly, without reducing growth. That's why I said that using foreign reserves as a tactical tool instead of interest rates may be a good idea,'' he added.
Referring to the recent fall in Korea's foreign direct investment (FDI), Guillen said that there are two reasons behind the setback.
``The first is that Korea has not been aggressive enough in terms of privatizing services and infrastructure industries,'' he said.
``The second is that foreign firms continue to view Korea as a country that discriminates against foreign investors and does not welcome them,'' he added. ``FDI is generally good, but Korea continues to be apprehensive about it.''
He stressed that the best recipe for attracting FDI is further liberalization of the economy, deregulation of the service and infrastructure sectors, and macroeconomic stability.
Guillen is the author of The Limits of Convergence, a book regarding globalization and organizational changes in Korea, Spain and Argentina since 1950. He received a Ph.D. from Yale University. His expertise lies in economic sociology and international management.