Road to Recovery and a Path to the Future

The following are excerpts of an interview between BusinessKorea and Yoon Jeung-hyun, Minister of Strategy and Finance, who managed the Korea financial crisis.

Q. What policy efforts have the Korean government taken since the Lehman Bros collapse to ensure the nation gets back on, the path to prosperity?

A: Since economics around the world began tumbling in unison last fall, countries have put stimulus policies of unprecedented scale in place to prevent a deeper recession. To fight against such economic distress, the Korean government introduced a fiscal stimulus package of 67.1 trillion won, including public spending and tax cuts, for the period between 2008 and 2012.

Furthermore, in April of 2009, the largest supplementary budget of 28.4 trillion won was approved by the National Assembly to shore up employment and growth, and to protect those most vulnerable. Korea also front-loaded fiscal spending to help the economy weather the crisis. We have also taken measures to stabilize financial and foreign exchange markets by cutting the key rates six times from 5.25 % to 2 % as well as providing adequate liquidity for the markets. Moreover, to continue reform in the financial and corporate sectors, Korea launched a 20 trillion won Bank Recapitalization Fund, and created a 40 trillion won Corporate Restructuring Fund.

We have pursued job-creation and job-sharing policies, and prepared measures to stabilize the livelihood of those vulnerable segments of our society. The Korean government has recently taken additional steps to ensure policies friendly to working and middle classes. At the bilateral level, Korea concluded currency swap agreements worth US$ 30 billion each with the US, China, and Japan; to ease concerns about the Korean economy. On regional and global fronts, Korea has successfully engaged in international policy coordination, such as in ASEAN + 3 and G20, to ride out the crisis.

More importantly, as I have always emphasized, the Korean government spared no efforts to bolster public confidence so that the Korean people would all work through the economic crisis as one. Based on firm public confidence and standing united, we were able to administer policy actions in a bold, swift, and decisive manner to deal with the crisis.

Due to the government’s active role and easing of international financial strains, the Korean financial market seems to be stabilizing. The good news is that the economy is brushing itself off and beginning its climb out of recession.

Korea was one of the fasted-growing economies among OECD member countries, registering 0.1 % GDP growth in the first quarter of 2009 and 2.6 % in the second quarter.

Industrial production has also improved. For example, mining and manufacturing production in July increased 2% from the previous month, maintaining the momentum of growth since January. The current account surplus is also a bright spot for the economy, standing at about US$ 26.2 billion in the first seven months of 2009. Some economic institutions forecast that the total surplus may go beyond US$ 30 billion by the end of the year.

Foreign investment in Korea reached US$ 6.8 billion as of July, up 32.4 % from the previous year. Barring unforeseen external shocks, the Korean economy is likely to keep gathering steam to reach a level beyond the initial target, an annual growth rate of negative 1.5 %. On the 9th of September, KDI brightened the outlook for the economy, projecting a negative 0.7 % growth for 2009. However, these encouraging economic signs did not come of their own, for I believe this strong performance is due mainly to our government’s policy responses.

Though the work of recovery continues with some satisfaction, this should not lead to complacency, as many people are still out of work and the economy still faces uncertainties and risks. At the domestic level, we do not see much vitality in the private sectors in terms of consumption and investment. Weakness in the labor market is another factor that may keep us concerned over the economy for a while. A high level of uncertainty and potential risks still remain in the global markets. There are risks of correction in advanced and developing economies, and volatility of commodity prices on the road to recovery.

We are still closely monitoring the durability of the recovery, even though we believe that we have now turned a corner, seeing some economic growth for the remaining quarters in 2009. I’d like to say at this point that we need to stay the course and continue our supportive expansionary policies until we are sure of solid recovery and revival in the private sector.

Recently, major economic institutions have brightened the outlook for the Korean economy by stating that Korea was successfully walking away from recession. However, we should not forget the historical lessons of policies made in 1930s US and 1990s Japan, when changes were made too early, causing prolonged recession.

The Korean government is committed to maintaining active fiscal and financial policies until the economy is firmly established to be on the road to recovery. While prudentially pursuing macroeconomic stability, the Korean government will implement structural reforms to improve the competitiveness of our economy. My view is that turning a crisis into an opportunity begins with structural reform. We will continue restructuring companies with unsound financial structure in large companies and SMEs.

The Korean government will continue efforts to create a better environment for foreign investment. This will include increasing incentives to attract foreign investment. For example, we will provide full exemption for rent on land in Foreign Investment Zones exclusively for parts and material production. The Korean government is committed to efforts to open up our economy in order to improve the competitiveness and productivity of our industries.

Korea will continue to expand trade and investment by ratifying FTAs with large economies like the US and India in an expeditious manner. I’d also like to ask the United States to pay more attention to the ratification of the Korea-US FTA in the near future. In global trade, we will continue to take a strong stance against any form of protectionism.

Last year, the Korean government proclaimed “low carbon, green growth” as a way to sustain economic growth. We will ease regulations on the entry and operation of key service industries, such as education and medical services, while formulating measures to support R&D activities in service industries.

Q. Could you tell us about the Korean government’s Exit Strategy?

A. Most countries have handled the financial crisis and economy recession through unprecedented, decisive, and concerted policy action. Currently, the G20 countries have said that it is premature to implement an exit strategy because they recognize the risk of deflation and also that the economic recovery is not yet stable. But, in order to release the market from fear of a disorderly exit strategy, it is appropriate that the issue be initially discussed with the G20 countries.

There is an opinion that each country needs independent measures according to its economic circumstances in consideration of exit strategies and mutual assistance, However, considering the spill-over effects from integration of financial markets and interdependence among various national economic circumstances, it seems more desirable that exit strategies are made within the framework of international cooperation. Changes of policies by individual countries may produce spill-over effects for other countries due to interdependence among countries and therefore every country needs to consider two risk factors when implementing exit strategies. The first is the possible negative impact made on the recovery of the global economy as certain countries try to make an early exit. The second is a possible hindrance to the stability of the global economy based on countries delaying their exit. In order to mitigate or remove these risk factors, international cooperation is necessary.

Considering barriers to international cooperation, and establishing general principles regarding an exit strategy and complying with them will be the realistic means for international cooperation and some general principles that can be considered are as follows.

Timing: Considering rash exit strategies in the 1930s and the 1990s caused dire consequences for the global economy, implementation of exit strategies at the manifest recovery phase is desirable. Therefore, proper criteria regarding this phase” should be prepared by the IMF.

Speed: As abrupt exit strategies may cause instability of the global economy, implementation should take place gradually and adaptively according to the speed of economic recovery.

Sequence: Withdrawals should be made first from nontraditional policy means where there is the gravest concern on distorted resources distribution, and then, expansive stances on traditional monetary and financial policies should be normalized. As for efforts towards fiscal consolidation, countries must act in concert with the speed of economic recovery and at the same time as this be helpful to the mid-term reinforcement of financial health.

Q. Will you tell the main result of the G20 London and Pittsburg summit?

A. The G20 Meeting of Finance Ministers and Central Bank Governors held in London over September 4-5, aimed to tune up the agenda of the third G20 Summit in Pittsburgh (September 24-25).

It reviewed the performance of the actions agreed during the Washington/London Summit talks and agreed that international cooperation for expansive macro-economic policies is still necessary in consideration of continued poor employment and financial market uncertainty and that advance preparations shall take place with the support of the IMF. This consensus is expected to contribute to mitigation of any market uncertainty.

It was also agreed that an orderly re-balance in global demand would be necessary for sustainable development of the world’s economy. It also reconfirmed the agreement made at the London Summit Talk, to complete quota reforms of the international financial institutions by 2011 and urged early ratification of quota reforms made in 2008. In addition, an agreement was made on the reform of additional finance regulations such as those for the compensation system and institutions that are important in terms of system.

The Summit Talk is significant in that the scope of discussions has expanded to post-crisis management such as the recovery of continued growth through measures against risk factors in the global economy after the crisis, and international cooperation to rebalance the world’s economy.

Korea led the discussion, presenting an issue paper on the necessity and principles of international cooperation for exit strategies and its main contents have been reflected in the statement.

At the same time, Korea held bilateral talks with finance ministers from countries including the USA, the UK, France, Canada, China, and Australia during the third G20 Summit in Pittsburgh. This reinforced Korea’s status within the G20 and resulted in Korea’s hosting of the G20 Summit Talk in 2010.

Q. What the main issues will the Korean government discuss with world finance ministers in the 2009 IMF Istanbul Annual Meeting?

A. Korea will participate in the General Assembly of the IMF and World Bank in October and plans to share stances on the agenda where there are differences in opinions among member countries, such as the area of quota reforms in the International Monetary and Financial Committee (IMFC) as well as bridging different opinions between advanced and developing countries. In addition, in its keynote speech, Korea will urge for the sustainable and balanced growth of the world’s economy and emphasize that international cooperation is necessary to effectively achieve this.