[59th] Timely Steps Propel Korean Economy
Strategy and Finance Minister
In the wake of the fall of Lehman Brothers, in the fourth quarter of 2008 and the first quarter of 2009, Korea faced its biggest economic challenge since the 1997 Asian Financial Crisis.
The U.S. financial crisis hit the global economy hard, and its consequences spread over to developing economies.
Back then, the world was concerned about the ever-deepening global slump, and the international financial institutions, such as the IMF, issued revised forecasts of lower expectations for the global economy almost every month.
The Korean economy was also contracting at a faster pace. In the fourth quarter of 2008, Korea's GDP shrank 5.1 percent quarter-on-quarter due to the tightening of global financial conditions and sharp decline in trade and domestic demand.
The Korean economy, facing instability in financial and foreign exchange markets amidst collapsing exports, responded decisively and swiftly to the financial crisis and, thereby, has shown hopeful signs of stabilization and recovery.
In the second quarter of 2009, Korea achieved 2.6 percent GDP growth quarter-on-quarter and, unless unexpected external shocks take place, Korea is likely to achieve its trend of positive quarterly growth.
Recent economic developments and outlooks
With the seizure of international financial markets in September 2008, Korea faced a sharp reduction in their credit lines, decline in equity markets and dollar shortage in foreign exchange.
Shortly thereafter, Korea experienced its largest export decline, which was negative 34.5 percent in January 2009. Due to the government's active role and easing of international financial stress, the Korean financial market seems to be stabilizing.
The equity market marked more than a 60 percent rise in the KOSPI since March. The Korean economy is brushing itself off and beginning its climb out of the deeper recession.
Korea was one of the fastest-growing economies, among OECD member countries, registering 0.1 percent in the first quarter and 2.6 percent in the second quarter of 2009.
The economic growth is also likely to rise to register a surprising performance record in the third quarter of 2009. Industrial production has also improved.
For instance, mining and manufacturing production in August increased 1.2 percent year-on-year despite summer holidays.
It posted consecutive positive growth in July and August and has shown growth momentum since January. With recovery trend in exports, the current account surplus is a bright spot for the economy.
It stood at $28.2 billion for the first eight months of 2009. The surplus rising past $30 billion in 2009 does not seem improbable.
Building on the crisis, Korea spared no efforts to turn the crisis into an opportunity to shore up Korea's market share in the international trade and was well placed to profit from solid growth in developing and emerging markets.
As a result of the government's supportive policy roles and Korea's performance in trade, the Korean economy will likely keep gathering steam to reach a level of about zero to negative 1 percent annual growth in 2009, and achieve four percent GDP growth in 2010.
Recently, IMF brightened the outlook for the Korean economy, projecting a negative 1.0 percent, and KDI forecasted a negative 0.7 percent growth for 2009.
Policy responses countering the crisis
However, these encouraging economic signs of recovery did not come from its own vitality of consumption and demand.
Weakness in the labor market may not disappear soon and the economy still faces uncertainties and risks.
The surprising economic performance of the year to date is mainly driven by the active and expansionary government policies. During the economic downturn, the Korean government's fiscal stimulus responses have been a critical line of defense to counter the sharp contraction in demand.
A wide range of monetary, financial and foreign exchange policies were also taken to ensure stability in the markets.
In order to keep the crisis at bay, the Korean government introduced an unprecedented level and extent of fiscal, monetary and financial measures.
The government took a fiscal stimulus package of 67.1 trillion won, including public spending and tax cuts, for the period between 2008 and 2012.
Specifically, in April 2009, the largest supplementary budget of 28.4 trillion won was approved by the National Assembly to support employment and growth. Faced with the crisis, the Korean people stood united to ride out the challenge faster than any other country in the world.
The Korean government made utmost efforts to font-load fiscal spending to help the economy weather the crisis. With compassion and care for the vulnerable people in the society, who were hit the hardest, the government pursued job-sharing and job-creation policies and prepared measures to stabilize the livelihood for those low- and middle-income groups of our society. The Korean government has recently taken additional steps to ensure working-and-middle-class-friendly policies
The government has taken conventional and unconventional measures to stabilize monetary, financial and foreign exchange markets by cutting the key rates six times from 5.25 percent to 2 percent and providing adequate liquidity for the markets.
At the bilateral level, the Korean government concluded currency swap agreements of $30 billion each with the United States, China and Japan to ease concerns in the foreign exchange market of Korea.
In the regional and global level, the government has successfully engaged in international policy coordination, such as in ASEAN+3 and G20 to deal with the crisis.
Last September, at the G20 Summit in Pittsburg, it announced that Korea would host the November 2010 Summit. Korea's hosting of the G20 Summit is a result of Korea's commitment to overcoming the crisis and sustaining the recovery with "the spirit of togetherness."
With those expansionary countering responses considered, more importantly, the Korean government spared no efforts to restore public confidence, and thereby, the Korean people courageously withstood and worked in unison throughout the economic crisis.
Policies for future prosperity
Aside from the anti-crisis measures, the Korean government has also been preparing policies and measures to enhance future prosperity.
The government is committed to efforts to open the economy, believing openness and free trade hold the key to prosperity, in order to improve competitiveness and productivity.
Korea initialed the Korea-EU FTA and concluded the CEPA with India in 2009. The Korean government has been taking a firm stance against any form of protectionism since the crisis.
In addition, the government is committed to continuing to enhance flexibility in labor market conditions and create a better environment for foreign investment.
Third, the Korean government is firm on making efforts to advance its services sector. It is important to ease regulations on the entry and operation of key services sector, including education and medical services, while formulating measures to support research and development activities in the sectors.
Last year, the government announced ``low carbon, green growth'' as a national agenda, using it as an engine to promote sustainable growth and create new markets and jobs.
It also introduced the "Green Growth Five-Year Plan" last July and will invest two percent of the GDP as public spending on green growth between 2009 and 2013.
Where we go from here?
While we expect the work of recovery to continue in 2009, the normalcy should not lead to complacency.
Though there is a welcome prospect for recovery, the ingredients of a lasting recovery are still missing.
And uncertainties and upside and downside risks at both domestic and international economy would likely remain for a period of time, though the Korean government, in line with the outlook of international institutions, is upbeat about our growth prospects.
The government believes we need to sustain our supportive responses until a durable recovery is secured while preparing for future policies to enhance growth potential.
With courage and perseverance to take bold and effective policies for today and tomorrow, the Korean economy has been weathering the economic adversity successfully.
The government will continue to commit to build our economy on a platform of stability and prosperity, combined with strong support from the Korean people and fruitful international cooperation.