Invest KOREA

Whirlwinds of a tornado scale have pounded the world economy one after another after the outbreak of the COVID-19 pandemic. Once the pandemic struck the world in early 2020, the global economy was completely frozen by the mandatory block out and social distancing. Oil prices briefly fell, and most countries without exception had suffered negative growth in 2020. That was just the first wave. If the vaccines were to develop by the end of 2020, it was believed the COVID-19 pandemic would become just another common flu that should fall into oblivion to the public minds.

Unfortunately, however, that was not the case. Even long after the rolling out of the vaccines, and long after the cease of the mandatory block out, the global economy has to face yet another pandemic; this time not medicinal but an economic pandemic of worldwide inflation. In the US, for example, the inflation rate surged to over 9%, for the first time in 40 years since 1981, and the story is not much different in other countries.

The global inflation data being so evident, causes of it are not equally self-evident. While some analysts point out the supply chain disruptions necessitated by the global block out, making production facilities to standstill, others emphasize the expectation of future inflation perpetuated the inflationary spiral. Yet other theorists believe the real cause was the enormous quantity of money supply accumulated over the last decade after the financial crisis and great recession since 2008.

As any macroeconomics text book teaches us, inflation makes everybody poorer as the real income of people must be taken away automatically by the rate of inflation. No matter what the cause is, inflation mercilessly chips away real income from our pockets. It doesn’t literally take away your money by force, but just rendering you to buy less with the same amount of money. Unlike other economic transactions where one wins when the others lose, inflation makes everyone lose. That is the cruelty of inflation. The only solace of inflation might be that there is no one that benefits from inflation, possibly except for the progressively tax collecting government.

The next malaise after the inflation-caused-poverty is higher interest rates. Most central banks have raised their policy rates substantially after rising inflation. In the US, the Fed has hiked the interest rates from 0.25% to above 3% in less than a year, and they have almost promised another jump, letting the rate be 4.0% or higher in 2023. In accordance with the US rate movements, many other countries tend to follow suit to avoid potential financial backlashes when they do not conform. Knowing in advance that the Fed will eventually have to raise the rates, the Bank of Korea gradually began raising its policy rate of 0.5% seven times from August 2021, until August 2022.

Now the BOK rate set at 2.5%, it is expected to rise at least 0.5% in the September meeting, and market lending rates would soar above 7% for average borrowers. As most of the Korean borrowers incurred debts on flexible rate loans, rising rates directly affect the loan service burdens, causing significant reduction in their disposable income. For example, the average borrower of USD 200,000 should pay 7%, USD 14,000 a year just for the interest payments. As average household income being about USD 35,000, it would have to pay almost 40% of the income just for the interest on the loan.

Last, but not the least, the shock wave of recent turmoil is the global dwindling of trade. Unlike other countries less dependent on trade, Korea critically rests upon global trade for its economic vigor and vivacity. As trade takes up almost 70% of GDP, nothing is closer to trade when it comes to economic growth. Now it is evident the global trade in the future inevitably has to slow down; higher inflation, reduced purchasing power, higher interest rates, and lingering pandemic all point to tepid slower trades and economic growth. The prolonged war in Ukraine only has worsened global inflation and supply channels.

With such challenges, every government has to find solutions of its own. The US and the Biden administration ventured out last August, 2022, with the audacious Inflation Reduction Act of 2022. The act wants to stimulate the economy by spending USD 370 billion on the measures to use more efficient energy sources for cars, houses, commercial buildings, and public transportation. In short, the IRA of the Biden administration aims at the dual task of anchoring the National Energy Security and of achieving higher economic growth at once. The key words for the Biden administration seems to be adaptation to climate change, usurpation of information technology supremacy, and maintaining global scientific dominance.

Now, Korea’s task is no different at all. Korea needs to maintain IT advancement, both in manufacturing and in research and development investments. Korea also seeks superiority in biotechnology and bio manufacturing. The new government’s five-year policy directives revealed in May adroitly pointed out that science and technology should lead the nation’s future economic growth and prosperity. In that audacious plan, the government plans to put USD 44 billion in investments for next five years on securing the national strategic technologies development and human resources education. The Yoon administration has focused on nurturing bio and healthcare industries, autonomous vehicle, smart farm, big data, robotics, IoT, to name just a few, and all these industries should proceed not by the government orientation but by their own active autonomy. The government’s role is just to provide long term resources and finances with the removal of the maze of regulations and ordinances.

In this exact respect, Korea needs to collaborate more with the US to navigate through this challenging world of never ending tumults. The US is the main source not just for Korean export products, but of the first rated technology and patents. Without US technology and patents, hardly nothing could be manufactured or sold in the US and the world. Of course, Korea has definite relative advantage in some areas such as manufacturing of semi-conductors or bio-medical products, and the US realizes the superiority of Korean products and manufacturing prowess. That’s why the Biden administration emphasized the importance of building an international alliance and cooperation such as CHIPS4 between the US, Japan, Taiwan and Korea. So, the destination has been determined, and the mast is up for now to set sail on.

By Professor Se Don Shin
Professor Emeritus, Sookmyung Women’s University
seshin@sm.ac.kr

*The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA