BOK Conference 2014
Aging could decrease Korea’s annual economic growth rate by 0.87 percent per year, as mentioned at the Bank of Korea (BOK) Conference 2014. Also mentioned is the possibility that the overseas liabilities of corporations in emerging economies, which have skyrocketed since the global financial crisis in 2008, could trigger another crisis.
Scholars participating in the BOK Conference 2014 discussed how to continue the sustainable growth of the global economy on June 2 at the main office building of the BOK.
“The number and ratio of people at the age of 60 and older to the international population is estimated to increase from 760 million to two billion and from 11 percent to 22 percent each between 2010 and 2050,” said Harvard University professor David Bloom, adding, “The population structure of Korea contributed to raising its annual average economic growth rate by 2.01 percent from 1965 to 2005, but is likely to lower the rate by 0.87 percent between 2005 and 2050.” He continued, “Still, the negative effect of an aging society can be alleviated if a labor market reform follows in the form of extended retirement age, women’s greater participation in economic activities, and an overhaul of pension systems.”
Bank of International Settlement (BIS) Senior Economist Shin Hyun-song mentioned the risk of the overseas debts of corporations in emerging economies. “These non-banking multinational companies have issued more and more foreign bonds since the financial crisis, and they could have difficulties in redeeming the bonds in the event of a decrease in global liquidity,” he warned. According to the BIS, their overseas debts jumped 44.7 percent in just two years from US$360 billion in 2011 to US$522.7 billion as of the end of 2013. In particular, those of Korea increased from US$41.2 billion to US$53.1 billion during the same period to outsize those of China at US$27.2 billion.
“International funds had flowed to small firms in emerging countries via banks in the regions before the financial crisis but the multinational companies in less-developed countries had to issue foreign bonds to supply the banks with the funds, which flowed to the small firms, after the outbreak of the crisis due to the tightening banking regulations,” he explained, continuing, “If the interest rate rises in advanced economies, the values of the currencies of emerging countries will drop to impose a greater burden on these companies, which, in turn, will result in the withdrawal of bank deposits, financing difficulties on the part of the firms, slowdown in economic growth and rapid decline in foreign funds’ investment in corporate bonds in emerging nations.”
MIT professor Ricardo Caballero warned about the possibility of a soaring global demand for risk-free assets and plummeting investment in risky assets leading to some shrinkage in business activities. “These days, the demand for low-risk assets is exceeding supply to cause corporations and financial institutions to spend more on financing,” he pointed out, adding, “Without financial innovation, the shortage of risk-free assets will continue to impose restrictions on the global financial systems.”
In the meantime, Harvard University professor Robert Barro had an interview at the press room of the central bank on the same day. “From the economic point of view, the recent Sewol ferry disaster is not a rare macroeconomic disaster such as World War II, the Korean War, or the Great Depression,” he mentioned, adding, “This means that the government does not have to intervene, although the catastrophe is likely to have a temporary impact on consumption.” A rare macroeconomic disaster can be defined as an event for which the GDP falls by at least 10 percent.