Who is afraid of what?

Again another new year began last week. Despite a rather short break in Korea there is a hope for happiness and luck with the usual January-like effect on the stock market. Undoubtedly in financial markets, both domestic and abroad, people would like to see the market thrive. Long live finance!

The financial industry has been criticized since the global crisis in 2008. Yet the financial market, especially the stock market, showed a strong rebound and resilience over time. With flowing liquidity and undiminished expectations on economic growth the financial markets were “relatively” successful in recovering market confidence and in some cases even turned handsome profits. In 2013 will such bliss continue or will it abruptly turn for the worse? What will both the best and worst scenarios look like this year?

The best scenario would hinge on a sharp rebound in economic growth. This would be driven by the emerging economies. The growth could be fueled by both exports to advanced economies and reverse imports from the emerging economies. It may not lead to inflation as quickly as in the past, and the stock market may soar to a new high. In particular, technological innovation could emerge, again led by Apple or Samsung or even Sony. The global economy may be in for another joyful ride of new expansion not unlike that of the 1990s.

In contrast, the worst scenario would be caused by the tightening of fiscal sprees. The Eurozone and the United States cannot avoid implementing tough macroeconomic policies targeted on fiscal consolidation. The emerging markets also could face unprecedentedly tougher export competition. Combined together, these might lead to a sharp contraction in imports. The leading economies may re-start to discuss new policy measures in order to recover market confidence. The stock market would jitter and the bond yield, plunge. It might become one of those recession years; the financial markets would wail and mourn over “lost dead finance.”

Both scenarios are purely hypothetical and quite extreme in their assumptions. But both stories reveal the need to carefully weigh the available options for the future of the global economy. One should try to avoid the worst scenario at all costs, while endeavoring to make the good one the “new” reality. How can we reduce the risks embedded in the worst case scenario and bring the good side of the economy to be our destiny in 2013?

The key challenge is how to identify and build up a new engine for growth. The new engine cannot solely depend on worldwide consumption, which is too interlocked and requires a massive level of combustion in energies, foods and even nature itself. The new engine should be more innovative and more diversified or a new way of production and consumption should be devised. Otherwise the world economy may be again trapped into a wasteful cycle of mass production and mass consumption. The consumption-focused growth may not be fully sustainable for the long term. In 2013 the world economy should try to take a more R&D-oriented approach and lead to long-term structural changes with ardor. Otherwise, the new growth may remain temporary and short-lived.

Also the world economy should rebalance internal issues such as social safety nets or social spending through rationalizing fiscal expenditure and building up taxable bases. When the economic recovery is sluggish, the higher tax may dampen consumption more than expected. But the key challenge the world economy has been facing is to rebuild effective demand on a global basis. Consumer sentiment around the world is likely to remain chilled for the time being, considering the lack of macroeconomic soundness, rapidly aging populations, and the skewed income distribution. So for the time being the burden for economic rebalance should be shared through higher taxes. It may have a crowding-out effect in the near term, but gradually the positive expectations on the future of the economy would outweigh the costs.

Last but not least, the world economy as a whole should give opportunities to the younger generations to establish their own businesses and pursue innovation. The innovation cannot be led solely by the older generations but should be shared between them. Also job creation cannot be effectively done by existing large or globalized firms wholly. The job creation should be led by small but promising young entrepreneurs. Those generations should be fully and on the long-term basis supported by the public sector. Innovation and job creation cannot be dealt with separately. At least for the next few years, the uttermost policy target should be to attract and engage the younger generation into the job market. In 2013 the world economy should materialize coordinated policy actions for job creation. The extant approach of overflowing the money into the financial market should not be the primary target even if it would be needed. The global economy should be well-prepared for taking the financial cost in providing jobs to the younger generation, which will create the virtuous generational cycle between the old and the young.

The prospect for the financial market in 2013 is not entirely gloomy despite lethargic economic recovery. But the major challenge for the global economy or the global financial market is to create a new economic environment through innovation, human resources and better income distribution, not by the cold-hearted logic of money alone. Happy New Year and looking forward to a still happier Christmas at the end of 2013.