By Park Jae-ha
Less than two months have passed since the start of the New Year, but the Korean economy is already facing many internal and external challenges and uncertainties. The primary challenge is that the global economy is rapidly slowing, led by declining advanced economies.
In particular, European economies are declining rapidly because of the impact of the eurozone crisis, while the United States is seeing a sluggish recovery following the global financial crisis. Despite international efforts to overcome the crisis and efforts of many countries to spur growth through stimulus spending, the global economy is far from experiencing a normal recovery pace. These unfavorable external economic conditions are significantly affecting Korea’s trade balance.
International financial markets are also expected to see significant volatility as many major European banks were heavily exposed to the distressed assets in the eurozone, which put them into serious financial difficulties. In addition, international commodity prices, particularly oil, may rise sharply if the unstable political situations in the Middle East, including the Iranian nuclear issue, suddenly worsen.
Domestically, Korea is facing many challenges, such as huge household debts, high youth unemployment, inflationary pressure, and growing trade deficits due to the economic declines among advanced countries, among others.
Faced with such diverse challenges from outside and inside the country, how can the Korean economy survive and grow? On domestic economic policies, the priority should be on macroeconomic and financial stability.
One important lesson from the eurozone crisis, as well as the 1997 Asian financial crisis, is that stable and sustainable growth is unattainable without sound, prudent monetary and fiscal policies and resilient financial sectors. In this regard, one of the Korean government’s top tasks to resolve is inflationary pressure, which should be controlled by employing preemptive monetary and fiscal policies.
In particular, politicians should resist the urge to offer populist policies during election campaigns this year.
Also, the government needs to tackle the challenge of making growth more inclusive and equitable. Recently, the widening of economic and social divisions has become one of most serious social issues in most of the advanced countries following the global financial crisis and eurozone turmoil.
Most importantly, Korea’s growth strategy needs to be rebalanced by shifting the sources of economic growth away from exports targeted to advanced countries and instead toward emerging economies and domestic demand.
Asia’s rise is one of the most dramatic economic success stories of recent times. Emerging Asian economies, particularly ASEAN, the People’s Republic of China, and India have continued their rapid development. As a result, Asia has become the growth center of the global economy.
For example, according to Asian Development Bank Institute research, these three economic giants together held nearly a 15 percent share of the global GDP in 2010. If these countries continue to expand at a projected average growth rate of 6.9 percent during 2010–2030, their share of global GDP is expected to almost double to 28 percent by 2030. By contrast, the global GDP share of the U.S. is projected to drop from 24.3 percent in 2010 to 19 percent in 2030, and that of Japan from 8.6 percent in 2010 to 5 percent in 2030. The sustained growth of Asia’s emerging economies will create huge markets supported by a blossoming middle class.
To benefit from the rise of Asia’s emerging economies, Korea needs to deepen trade ties and strengthen economic and financial cooperation in the region. Korea has been playing a leading role in regional forums in Asia, and these efforts need to be accelerated. Furthermore, Korea needs to expand financial aid and intellectual support to assist the economic development of emerging Asian countries. They are in Korea’s own national interest.