Exit Strategy and Double Dip

By Lee Sun-ho

With respect to predictions on the global economic outlook in 2010 and beyond, we have frequently been hearing about two prevailing economic terms through various mass media at home and abroad.

One is the exit strategy, while the other is the double dip. It is not easy to precisely explain what the two terms mean and how they interact with each other, to the people ― audiences and readers ― either in Korean or in English.

The former term, originating with the U.S. military's decision to withdraw its troops from Vietnam in the 1970s, is a way of bailing out of an unfavorable situation.

The most common strategy is simply to sell one's equity position to someone else. It is a means of cashing out an investment.

Without an exit strategy, we may be in a quagmire. At best, the strategy pegs a withdrawal to the achievement of an objective worth more than the cost of continued involvement.

The latter one, a term used by economists for a second recession, is characterized as a recession immediately after a short-lived rebound. It often includes a slowdown in demand for goods and services because of layoffs and spending cutbacks from the previous downturn.

The two economic terms can closely be interacted in dealing with global and sovereign risks involved depending on the trials and errors of the strategic thinking of professional forecasters, whether they are optimists or pessimists.

With signs of an economic surge across the globe, on the one hand, optimists have sprouted that the global economy is passing through its worst point and a sustained recovery is in the offing.

They assert that the world economy is unlikely to go into a double dip and existing risks are manageable. As the global economy has been shaken during a year of recession, many policy planners at home and abroad insist that it is risky to plan any exit strategy, because it causes a double dip when the GDP growth slides back to negative after brief positive growth.

On the other hand, pessimists have warned against hasty optimism, forecasting that the global and U.S. economy will enter a W-shaped (in contrast to U-shaped or V-shaped) inflation-induced slump in 2010 once major countries start unwinding their expansionary policies.

Regardless of the timing of implementation of an exit strategy, the risk of tipping their economies back into stagflation will not only spill over by ending global monetary and fiscal easing but also by energy, food and oil prices rising faster than the economic fundamentals at the last stage of the bygone bubbles in the U.S., Japan, China, the European Union and the Association of Southeast Asian Nations (ASEAN).

If no clear exit strategy is outlined, there is the potential of a perfect storm: the recovering world economy falling back into a double dip recession.

Timing for an exit strategy for governments that stepped in to support economies during the crisis will depend on the strength of their economies.

Beginning with a mind for happy endings, we must plan for all four D's (death, disability, divorce and departing) to develop an effective business exit, as Stephen R. Covey, one of Time magazine's 25 most influential Americans, mentioned in his book, ``The Safe Methods of Successful Living.''

Despite the stimulus package helping stop the economic downturn, few expect a true recovery until the end of the year at the earliest ― economics is called the dismal science.

For example, once the U.S. dollar falls against its major rivals, investors will flock to higher-yielding assets such as stocks and commodities with better-than-expected earnings.

As for private involvement, the outflow of short-term private capital which may be bailed out by official support encourages ``moral hazards.''

Steps were also taken to encourage large companies to raise capital through the debt and equity markets. Restrictions on initial public offerings (IPO) were renewed so that companies could only do so by fulfilling registration standards.

But listing on the stock market is to be scrutinized with a special focus on accountability and transparency of corporate governance.

We have been flexible in applying to many positive elements from abroad in overcoming the global socioeconomic disturbances facing us. In fact, Korea demonstrated an unprecedented recovery from the 1997-98 Asian financial crisis.

Yet an improvement in growth expectations has been awaited since the start of the last year, although there is still a high level of uncertainty with a risk of another downturn.

No doubt, it is always wise for Korea to be well prepared to meet the uncertainty of any global and sovereign risks, as cautioned by the examples of the cyclical difficulties of the PIGS (Portugal, Italy, Greece and Spain) in the Mediterranean region or Japain (Japan pain), in the years to come.

For the mutually-respectable devices for international economic coordination to be continued into 2010 and beyond, long-term but safety-belt policy guidelines in Korea need to be sought based on suitable forecasting of whether we should carefully adopt exit strategies or whether the global economy falling into a W-shaped recession becomes a reality in our emerging market economies.

The writer is an outside director of KunWha Pharmaceutical in Seoul. He can be reached at kexim2@unitel.co.kr.