It is becoming increasingly apparent Korea ― and the world ― doesn't see the big picture of the ongoing crisis.
Just half a month ago, government officials here said the domestic financial markets would regain stability since the nation had all but gotten out of the ``dollar liquidity crisis." On Thursday, the exchange rate was threatening to touch 1,500 won per dollar, while the composite stock price index plunged below 1,000 points with the two key market indices swapping their faces as of early this year.
As recently as August, most governments were grappling with inflation, as world oil prices approached $200 per barrel. Now, officials in Washington and Brussels are saying their economic enemy No. 1 next year would be ``deflation."
The U.S. core price index, which excludes food and fuel, fell 0.1 percent in October, the first monthly decline since 1982. Inflation-stricken consumers may think it a good thing but persistently falling prices bring about far scarier consequences to the economy than price spirals by freezing everything ― consumption, sales, investment and new employment, as shown in the 1930s. Deflation can be a harbinger of the much dreaded ``D" word ―depression.
What makes deflation more troublesome for policymakers is not just that the business slump is deeper, wider and longer but that there is no particular cure to treat the declining prices, as they cannot pull down key interest rates below zero percent. This is why the U.S. and European Union are preparing new hefty stimulus packages.
With inflation hovering around 5 percent, Korea may be free from the deflationary fear for now, but recent events have shown symptoms of turmoil across the Pacific spread here in no time.
Or rather, deflation has already set in: While goods and services prices are not falling, asset prices have long been declining, as seen by the moribund property markets. What also makes Korea particularly vulnerable to global downturn is the nation's undue dependence on exports for growth. If the trend of sluggish or negative growth spreads from industrial to emerging economies to drastically shrivel the global export market, the nation will run into its most serious crisis in decades.
Because of these and other factors, including the weak banking sector, foreign media outlets hardly fail to include Korea in the group of countries exposed to the greatest risk, along with Iceland and Brazil, rating Korea's chances at brushing against state default higher than those of even much smaller Asian economies, like Thailand and Malaysia.
Most problematic is the economic team of the Lee Myung-bak administration, which once attacked the unfavorable foreign news reports as some sort of ``Korea-bashing." Little wonder according to some foreign analysts, the nation's biggest economic risk is ``governmental risk." The economic team, led by Finance Minister Kang Man-soo, has shown neither nimbleness nor good teamwork since the crisis hit the nation. On the other hand, they were quick to receive credit for any accomplishment, such as the $30-billion dollar-swap accord with the U.S., whose market-stabilizing effect seems to have already gone away.
The snail-paced restructuring of ailing builders and savings banks is but one example demonstrating the economic team's incompetence and why it has lost markets' confidence, both here and abroad.
Judged by what officials have done so far, it is highly doubtful that they can cope with the much worse possibility of deflation by providing sufficient liquidity, introducing bold reforms and taking aggressive stimulus steps. President Lee called for Korean businesses to turn the crisis into opportunity through active investment. Such a call, if unaccompanied by exemplary initiative and detailed guidance, cannot but ring hollow.
Lee should force his team to change its administrative style to win markets' confidence. If it cannot do so, he should change the team itself. There must be far more competent and credible officials if he would only look for them ― after dropping political and religious biases.