By Kim Tae-gyu
Staff Reporter
Two worst-case scenarios haunt Korea Inc. One is a double dip, or another downturn after a short-lived recovery, and the other is a fast rise of consumer prices dubbed hyperinflation.
Even most authoritative experts are split into two opposing camps regarding which is more plausible. So are the nation's top economic bureaucrats, from the finance minister to the central bank.
Concerned about further economic slumps, Finance and Strategy Minister Yoon Jeung-hyun has spearheaded advocates for expansionary policies. Yoon, however, dropped confusing hints that he might opt to put the brakes on, but ministry officials said he has not changed his position and his remarks were aimed at hedging against adverse market reactions that are expected from his overemphasis on expansion.
Backing this view is that from a macro-economic perspective such a policy change carries risks of dampening the recovery prematurely. The United States, as well as other countries, is also facing the same conundrum following the introduction of a major stimulus package, but few are taking anti-inflationary measures.
``Some indicators have shown signs of recovering but we cannot be complacent since there still remain some fearful factors,'' Yoon told reporters late last week.
``Although the pace of the downturn is slowing, it is obvious that the economy is still heading downward. We should not shift our policy focus right away,'' he said.
Under that mantra, Yoon made it clear that the ministry will continue to stimulate the economy so that Asia's fourth-largest economy does not fall into another recession.
By contrast, Bank of Korea Governor Lee Seong-tae contends that now is the right time to think about an exit strategy from the expansionary policies.
``Thanks to proactive pump-priming measures of the government, industrial production has substantially improved and the stagnation of consumer consumption has also eased to some extent,'' Lee said late last week.
``We are required to prevent the expansionary fiscal and monetary policies from weighing on the economy,'' he said.
Lee added that the liquidity channeled by the government to revive moribund businesses could bring inflationary pressure in the near future, and so pre-emptive measures are necessary.
Conflicts between a finance minister and a central bank head are ubiquitous across the world because the first typically cares more about growth while the latter puts inflation on the front burner.
However, experts point out the clash may lead to a big headache this time around, should the two leaders come up with conflicting policies ― Yoon increases spending while Lee withdraws money from the market.
``If you are on the side of Finance Minister Yoon, you should try to artificially inflate the economy by printing more money or spending more,'' said a Seoul analyst who declined to be named.
``If you are with BOK Governor Lee, you should attempt to absorb the liquidity and stop spending. The problem is that there is no happy medium between these two views,'' he said.
Another top financial policymaker, Financial Services Commission Chairman Chin Dong-soo, has vowed to fight against the double dip but he seems to be unsure of whose side he is on.
``Let me hammer home that hasty conclusions that the crisis is past us will only cause us to miss timely policy measures. This would greatly hinder the recovery process,'' Chin told a forum Friday.
``As such, from a policy standpoint, we shall stick to our current crisis management track and carefully look towards formulating mid- to long-term solutions,'' he said.
When it comes to small- and medium-sized enterprises (SMEs), however, Chin changed his tone from the previous stance that the FSC will go all-out to help them stay afloat.
``There is a concern that the rapid increase in lending to SMEs may backfire and raise the overall risk for the economy,'' Chin said.
``We shall address this problem by adopting more flexibility regarding the level of financial support for SMEs. We will also ramp up risk management on our credit guarantees,'' he added.
The FSC pulled out all the stops to help out SMEs over the past several months. For example, it has extended 100 percent credit guarantees for small-sized firms so that banks can roll over their debts that are due this year.
The finance minister is in charge of generating international financial policies, including foreign exchange rates, while the FSC is responsible for domestic policies.