Domestic demand key to long-term growth

The International Monetary Fund maintained this year’s growth forecast for South Korea at 3.5 percent Tuesday in its global economic outlook. The figure is the same the IMF predicted in January but represents a 0.5 percentage point drop from its September estimate.

On Monday, the Bank of Korea lowered its growth forecast for South Korea from 3.7 to 3.5 percent, citing an anticipated slowdown in exports, still the prime engine of the country’s economic growth. The central bank predicted that export growth will be halved from 10.5 percent last year to 4.8 percent this year due largely to the slow global economic recovery arising from Europe’s debt crisis.

Most economists say our economy will undergo hardships in the short term, citing other negative factors such as widening income disparities, soaring inflation linked to high oil prices and snowballing household debt.

Minister of Strategy and Finance Bahk Jae-wan also made a gloomy forecast Monday. He said the economy is now on a path to recovery after hitting bottom in the short-term perspective but raised the possibility that economic woes will continue over the next five years. This means that Korea is in the stage of recovery in the perspective of domestic business cycle but that it will take a long time before the economy is normalized, given the prolonged global economic slump.

All the economic news is not bad, though. The IMF raised its global growth forecast for this year to 3.5 percent, up from its January projection of 3.3 percent although it warned that the outlook was ``very fragile’’ and could be shattered by the eurozone crisis and high oil prices. To our relief, the global funding agency’s growth estimate for China, the country’s largest export destination, was forecast at 8.2 percent, slightly stronger than previously believed.

Nonetheless, the country’s heavy dependence on exports is serious enough to paint a grim picture for its long-term economic outlook. In fact, the Korea Trade-Investment Promotion Agency (KOTRA) predicted that exports will be sluggish in the second quarter of this year following a downturn in the first quarter. The export leading index for the second quarter was tallied at 51.7, slightly up from the first, and in this climate it would be difficult to expect a full-blown export upturn in the April-June period.

Now it’s high time to find fundamental solutions for the sake of long-term economic growth. As has been pointed out frequently, top priority should be given to vitalizing domestic demand. The notion that exports alone could stimulate growth holds good no longer. Economic polarization has deepened as Korea’s dependency on trade rose from 38.6 percent in 2000 to 52.4 percent in 2010.

It’s no exaggeration to say that the country’s future lies in whether to find an optimal point that could balance exports and domestic demand through appropriate macroeconomic measures and socioeconomic policies. In this process, it would be much better for South Korea to transform itself from a fast follower to an innovator.