[INTERVIEW] Nobel laureate Stiglitz warns Korea of post-pandemic shocks

Columbia University professor Joseph Stiglitz / Korea Times file

Former World Bank chief economist expects reassessment of global supply chain

This is the fourth in a series of interviews with global economic experts analyzing the economic fallout of the COVID-19 pandemic and possible countermeasures against a global recession. ― ED.

By Park Jae-hyuk

Nobel Prize-winning economist Joseph Stiglitz warned that Korean chipmakers Samsung Electronics and SK hynix could fall victim to COVID-19 as the coronavirus pandemic will disrupt global supply chains and reduce demand for semiconductors.

He called on Asia's fourth-largest economy to take preemptive steps against the fall in global chip demand, which he expects will occur in the aftermath of the coronavirus crisis.

In a recent phone interview with The Korea Times, the Columbia University professor said there will be a "total reassessment" of global supply chains, which could affect the export-reliant Korean economy, even after the pandemic is under control.

"In those areas where Korea is the dominant supplier, there will likely be over the coming years a reduction in demand as a result of diversification," he said.

According to the former World Bank senior vice president, the recent shock to the global supply chain will lead the international community to seek national and supplier diversifications, as well as having them feel the necessity for better resilience against future disruptions.

"We've lived in a world with highly integrated global supply chains that were based on a principle of just-in-time inventory production ― no slack ― and the assumption that everything will go normal. And we know that's not necessarily the case," he said.

"We had a global supply chain that was very efficient in terms of driving down short-run costs, but no capability of a large global shock that we are having. I think that's probably the greatest vulnerability we're seeing."

Although the professor considered Korea well-poised to handle this shock, he said this could be "very critical" in certain areas, for instance semiconductors, for which the world depends on Korea.

"That means you can expect countries having learned this lesson, even though Korea has performed very well and has become a model for the rest of the world," he said.

"They will say, well, we just can't tell where the next crisis could come, and we'd better get some more domestic production capacity or more diversified production capacity."

Stiglitz was also definite that the global economy has already entered a recession.

"The recession, in terms of a market slowdown, that's already here," he said.

"The unemployment rate is going to go up in the United States to 20 or 30 percent ― maybe disguised ― but it will be serious, and there will be a global slowdown."

He stressed that international cooperation, including the G20 summit, will not be able to prevent the recession that has already come.

However, he expected that this could at least prevent the global economy from getting much worse.

Admiration for Moon's salary cut

During the interview, the economic guru also evaluated a series of measures Korean policymakers have taken against the economic fallout of COVID-19.

He especially gave favorable comments to the country's latest trend of returning a certain amount of salaries voluntarily, which has been done by state-run company executives and top government officials, including President Moon Jae-in, as part of efforts to share the financial difficulties caused by the virus.

"To me, looking at our selfish CEOs, I find it admirable," he said.

"It reminds me of what happened during the IMF crisis, the East Asia crisis at the end of the 1990s, when many Koreans contributed gold, their rings and things to help correct, to help the balance of payments crisis."

Stiglitz disagreed with critics who claim the movement among richer people could lead to falling domestic consumption.

"I wouldn't worry about the macroeconomic effect on the aggregate demand. I think the social solidarity that represents has enormous value to any society, any economy. There are tools that we can use to increase aggregate demand if that turns out to be a problem," he said.

"I don't think it will. I think at the least in the United States in the aftermath of the crisis, we're going to have lots of demand for, need for rebuilding and doing all the things that we haven't done for two, three, four or five months."

In response to those who worry about an insufficiency of aggregate demand, the economist said that was a problem that could be addressed if it appears on the horizon.

Targeted basic income

Regarding cash handouts that he had discussed frequently during his previous interviews with foreign news outlets, Stiglitz said Korea may use a targeted approach on condition that its "administrative capacity" is high enough, unlike the United States which he said lacks the ability to get money to those who are particularly needy within a couple of weeks.

"The focus ought to be protecting the most vulnerable and protecting the economy. How targeted one wants to be really depends on the administrative capacity of the country," he said.

"I think for South Korea, the ability to get money out quickly, and maybe, if you have the records to do it on a targeted basis, the sole issue of whether to limit it to poor people is only a question of administrative capacity."

The professor also recommended Korea focus more on fiscal measures, saying this crisis is not going to be addressed effectively by monetary policies.

"I think President Trump helped perpetuate really deep foolishness that monetary policy was the answer," he noted.

"Lowering the interest rate is not going to lead people to invest more right now, when the economy is imploding. It will maybe help the stock market, but the evidence is that they didn't even do that."

The economist urged policymakers to prioritize protecting health, protecting the most vulnerable and making sure the economy is in the right position to recover, rather than just helping the stock market.