[59th] No Double-Dip Recession for Korea
Professor at Sungkyunkwan University
It appears the Korean economy has already seen the trough and the U.S. economy will also bottom out early next year on their way to recovering from the severe and painful recession.
Naturally, an important question is whether or not this recovery is just temporary.
When a patient comes home from a hospital after a lengthy stay, he is greeted with great fanfare by family members, friends, and neighbors.
The fanfare is louder if the patient has been discharged earlier than expected while other patients are still in the hospital.
Yet, both the community and the patient will want to know if the discharge indeed means the condition has been completely cured of if a recurrence of the same problem is possible.
Out of the OECD countries, Korea happens to be the first to have recorded positive economic growth and is about the leave the hospital where some countries are still in the intensive care unit.
Cautiously, but confidently, I will say that Korea and US economies will not have a double-dip recession. Though not particularly robust, both economies will be heading for a healthy and prolonged recovery.
We all know why Korea, along with many other countries, got hospitalized. The epicenter was the United States for its complacent and reckless management of mortgage loans and other banking activities.
Once the earthquake started, a tsunami overwhelmed virtually all the countries, large and small, near and far. Because of close linkages, financially and non-financially, Korea was one of many innocent victims, and a serious one at that.
The subprime mortgage debacle and subsequent collapse of banking and financial institutions forced the U.S. government to bail out many of them and infuse an astronomical amount of public funds under its Troubled Asset Relief Program, on top of stimulus packages.
The U.S. unemployment rate, which was below 5 percent in early 2008, has ballooned to close to 10 percent now. That is, one in 10 adults who want to work is unemployed.
Those who have lost their houses through foreclosure number in the millions. The United States had to increase its government spending by close to $1 trillion to stimulate its economy by cutting taxes, helping college students and the newly unemployed, and paying for other entitlements.
Korea likewise spent a lot for its stimulus package. In late 2008, the Korean government approved over $25 billion and hired 250,000 people for social service work or the public sector.
In both Korea and the Unites States, key interest rates for monetary policy are at record lows. Of course, Korea and the United States are not alone. Country after country has implemented fiscal and monetary stimulus packages as if they are in a race.
Because of these generous and loose fiscal and monetary policies, both countries, as well as other countries, have gotten life support through collective blood transfusions.
There are nevertheless some important differences between the two countries. While the unemployment rate in the United States has almost doubled, that in Korea has hardly shown any increase, at least in the official rates.
Whereas real estate prices in the United States have gone south considerably, the reduction in Korea has not been sizable.
Though the United States continues to have huge external deficits (albeit at a reduced level, which is a symptom of the recession), Korea has been enjoying large, at times at record, trade surpluses.
Then, the foreign exchange rates affect both countries. The won-dollar rate was about 1,100 won in the summer of 2008, went up as high as 1,600 won at year's end, then came down to below 1,200.
Thanks largely to this low won value, Korea could export a lot to other countries, including the United States. The engine of economic growth in Korea is truly its exports.
Korea is a great beneficiary of the U.S. stimulus package in that it is able to export to the United States.
Korea is scarce in natural resources and it imports most basic resources. When the value of the won gets low, Korea can export more but has to pay more for its imports. When the value goes up, on the other hand, exports decrease while import prices are cheaper.
The benefits of low import prices will not be negligible. As long as Korea can export, it will be able to enjoy better terms of trade with a higher export profit margin.
Therefore, the level of the foreign exchange rate is less important for Korean industry than its fluctuation. The uncertainty about the future exchange rate will hurt foreign traders the most. The country should find a way to stabilize the won's value.
The strong exporting helped Korea to get discharged early from the hospital. But is it likely to return because of a so-called double-dip or W-shaped recession?
My answer is no, mainly because the United States and Korea, and other countries for that matter, will not use early exit strategies on their stimulus economic policies.
In both countries, stimulus packages and bailout funds were made at record levels. Both monetary and fiscal authorities were able to amass these policies in spite of due concerns and worries by many.
Therefore, they cannot afford to lose their support system as long as economic growth is in the doldrums. They were able to formulate and implement such an astounding scale of bailouts and stimulus packages to reduce the size of the downfalls.
If they exit too early or too quickly, criticisms against their original plans will be exponentially amplified. They have all the incentives to make these policies work.
In addition, both monetary and fiscal policymakers will have to get involved at the same time. But they do not have luxury to blame other in case policies fail.
In my view, if anything, the exit will be too late or too slow rather than the other way around. In addition, next year is a midterm election year in the United States.
Both political parties will not want to be blamed for another recession.
Since the policymakers in both countries can ill afford the failure of their policies already in place, they will continue to add new stimulus packages until their economy is in order.
As the chance of a relapse is negligible, should Korea celebrate its early discharge from the hospital?
Though the chance of going back is small, however, it does not mean the economy is healthy. The official unemployment rate is low, but it does not reflect the true employment situation.
More than a quarter million workers are hired by the government and they make minimum wage by doing -- sorry to say this -- something that is neither profitable nor sustainable. Also important is that a massive number of people, though they do not work, are not looking for jobs.
They are discouraged and they have given up. Whenever a government spends money, its gross domestic product (GDP) will go up at least by that amount. Korea's GDP is close to $1 trillion. If the Korean government spends an extra $25 billion dollars, its GDP would go up by 2.5 percent.
Yes, it is not difficult to jack up the GDP. But the hiring of temporary workers by the government will not generate future GDP growth.
The U.S. housing market and many financial institutions are going through considerable restructuring. Recent data shows that the earnings of many corporations reveal improvements (though their sales lack any real growth) which indicates the improvement of their productivities.
The U.S. economy will emerge strongly after the recession with heightened competitiveness and improved productivity.
On the other hand, the private sector in Korea is not adding much employment or productivity improvement in comparison to the stimulus package, which is mostly for public sector and social services.
I am now more concerned about the Korean recovery than the American one.
Present stimulus packages in Korea are largely consumption oriented, not investment oriented.
Almost by definition, the public sector cannot create well-paying competitive jobs. It has been less painful for Korea to circumvent serious restructuring and reduced consumption. With the lack of restructuring and innovation, Korea's economic growth may unfortunately be anemic in the future, which may even be less propitious than a mild double-dip recession followed by robust growth.