What Korea Could Do in the Midst of the Global Depresson

One of the most read posts on this blog is “What Korea shouldn’t (could) have done since the 1997 financial crisis”.

Following up on that, I have discussed how things have worked and what has gone wrong in hopes that Korea continues to sustain and prosper in terms of the good of the Korean economy as a whole and its productive/innovative capacity.

In short, instead of rebuilding and reforming the broken system which caused the 1997 financial crisis, Korea has engaged in its own version of extend and pretend. Among others, Korea’s easy money policy, while this is not limited to Korea, has fuelled the misallocation of capital at the expense of productive investment.

Korea has to face the deleveraging mess. That is a reality.

Things move in cycles. Most nations go through the long-term cycle of economic prosperity and downfall; they rise to a peak, and then descend into a trough. Aside from the fact that Korea is not immune to the Global Depression which we are in, one has to probe whether Korea is heading into the down phase of the cycle.

What Korea should/could then do to revive and sustain the real economy in particular and the social fabric as a whole?

-Protect and rebuild the productive assets. This is the only way out.

-Restore the manufacturing jobs by keeping the jobs Korea has and creating new jobs in new productive industries.

Manufacturing and productive capacity has been the driver for jobs. Without the median wage improving, the Korean economy won’t enjoy sustainable recovery. Korea’s manufacturing jobs have been shifted to China and other Asian nations due to several factors such as the U.S. dollar policy and wage arbitrage. Korea has been engineering the mechanism for piling on debt to make up the difference through the asset and credit bubbles. Those compounded by the slump in Western demand have led to the mess Korea is facing.

-Allocate capital constructively and sustainably in productive sectors, not in unproductive and speculative sectors.

-Reorganize the banks and recognize all the bad loans.

-Given that trade surplus would decrease and asset bubbles would pop in not so distant future, pursue a conservative fiscal policy.

-Recognize the flaws in the export-led growth model and the mercantilist approach.

-Provide incentives and appropriate infrastructure to foster entrepreneurship and grow SMEs since they are the engine of hiring; Reduce the cost structure for small business and remove the impediments to starting new businesses and hiring workers.

This requires the government to stop offering any favors including tax breaks to chaebols and picking winners.

-Reestablish social culture in which hardwork and dedication are pursued to gain security and reward. Leaders in the political, business and academic classes may have to abandon a “me first” attitude.

-Beware the geopolitical dynamics.