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The COVID-19 pandemic in Korea has shown a definite beam of hope as the number of new cases has drastically fallen from a few hundred a month ago to the single digits for a while. The way the Korean health administration and officials have handled the malaise got worldwide acclamation, and even the adamant US President Donald Trump praised the country’s effectiveness and thoroughness. Although it is not over yet and the potential future outbreak still lingers, Korean people as well as the authorities are beginning to consider gradually easing the tight rein of enforcing the social distancing and mandatory partial lockdown that has restrained for some time regular economic activities and social life.
A definite sense of optimism on one side, yet there is the other gloomy economic picture lurking in the corner as the statistics of the dark era of COVID-19 began to emerge on the surface. Indeed, the Bank of Korea statistics just released showed that the tentative first quarter GDP growth rate was –1.4% and the private consumption –6.7% over the last quarter. The manufacturing industry production fell from 1.6% in the last quarter of 2019 to –1.8% in the first quarter of 2020, and the retail and wholesale distribution industry fell from 1.4% to –6.5%, while entertainment and other service industry dropped from 0.1% to –6.2% in just one quarter. Remembering that these poor numbers are just a partial reflection of the real impact of COVID-19 which might have been deadlier in the forthcoming second quarter months, it is not surprising at all to hear the deputy prime minister warning against a more pessimistic outlook for coming quarters down the road.
Against this backdrop of apocalyptic economic forecasts, the Ministry of Finance and Economy has audaciously pledged a series of measures starting from March to fight against the gargantuan challenge that COVID-19 has posed on Korean economy. So far, since the outbreak early January this year, there has been a total of eight sets of drastic policies to counter the negative effects of the pandemic. The entire size of the means and finances is totaling over KRW 282 trillion, equivalent of USD 235 billion, making up approximately 16% of 2019 GDP. The nation has never witnessed such a grand-size package of policies in the past. Neither the IMF emergency measures in 1997 or the solutions for the 2008 financial crisis was not as big as the COVID-19 measures. It is relatively bigger than Japan’s JPY 56 trillion emergency measures which is about 10% of its GDP, or Singapore’s pledge of 11% of its GDP for emergency projects. Only Germany surpassed all other countries by allotting almost 30% of GDP for the emergency purposes.
The grand plan has multi-targets: first, encouraging employment; second, emergency funding to SMEs as well as the seven core industries such as automobile, airlines, transportation, retails, shipbuilding, machineries, electricity, and communication; third, stabilizing the financial markets; and finally, subsidizing household incomes.
To uphold employment, the measures encourage SMEs to avoid laying-off employees by providing more incentives for longer periods. The legitimate areas of support are extended to airport limousine service workers, duty-free shop workers, conference employees, and airport staff and engineers. Also, the plan tries to provide emergency subsidies to more than 1 million people such as freelancers and delivery servicemen not protected by the public unemployment insurance. Major core industries are also supported by providing funds for capital replenishment or short-term liquidity. There is a strong possibility that a few other labor intensive industries such as hotel or retail could be added to the aforementioned seven industries above. However, it should be reminded that the biggest chunk of the financial resources is devoted to maintaining financial stability, especially in the stock and bond markets. Out of the total of USD 235 billion budget, USD 130 billion is allocated for the purpose of financial market stabilization. Among it, USD 42 billion is designed for direct capital markets intervention, and the rest is used to prevent insolvency due to liquidity shortage. It is the general recognition that once the capital markets are in jeopardy, the entire Korean economic system could crumble in a very short time as the sudden flight of foreign capital would entail extreme movements of the stock prices as well as the exchange rates, which could generate a vicious cycle of exchange depreciation and stock price free-fall. Therefore, a preemptive action by the authorities is crucial for a successful and effective prevention of any kind of economic and financial crisis.
While the unprecedented size and opportune timing may be all right, the last-but-not-least important point deserves to be highlighted. All these policies are emergencies in nature, preventing economic meltdown. They don’t necessarily promise a brighter future. They need to embrace productive plans such as building dams, highways, hospitals or schools as in FDR’s New Deal. Preventing a disaster is definitely one thing, but building a completely new economy is another. For Korea’s version of the plan to be successful, the only missing piece is to have a series of productive investment plans. It is not strange at all to expect a next set of emergency policies to be directed to that target.
This will also pass by.
By Professor Se Don Shin
Dean, Sookmyung Women’s University
The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA