(EDITORIAL from the Korea Herald on Feb. 12)

No complacency

The threat of calamity that messy public finances are posing to Portugal,
Ireland, Greece and Spain is yet another reminder that Korea cannot afford to
remain complacent about its debt-financed recovery from the global financial
crisis.

Korea's financial foothold may not be as firm as its top economic
policymakers are claiming.
At the moment, an issue of great concern to Koreans is whether or not the
financial trouble in the four European countries, which are dumped into the
not-so-enviable PIGS acronym, will spill over to other parts of the world and, by
doing so, draw Korea into another crisis.
Korean policymakers are quick to reassure that Korea's public finances are in
good shape when compared with other countries in the world. They say the impact
of fiscal crises in the European countries will be limited for Korea, whose
liabilities as a percentage of gross domestic product is much lower.
True, Korea's national debt amounted to 35.6 percent of its GDP last year, much
lower than an estimated 113 percent for Greece or 54 percent for Spain, the
lowest among the four. Korean policymakers are also quick to point out that the
fiscal deficit Korea sustained to fuel a recovery from the worst crisis since the
Great Depression accounted for a mere 2.8 percent of GDP, while Britain and many
others incurred much larger fiscal deficits.
But the Korean public is not easily convinced of their country's invulnerability.
It has good reason not to. For Koreans, the memory of the 1997-98 Asian financial
meltdown, not to mention the current global financial crisis, is still fresh. At
the time, Korean policymakers maintained right up to the last moment that Korea
was unlikely to be driven into the financial disaster because its "economic
fundamentals" were sound. But it did not take long before it had to go hat in
hand to the International Monetary Fund for a bailout.
A decade later, many Koreans may have believed that the foreign exchange reserves
- exceeding $200 billion - would provide their country with adequate protection
against a similar crisis. But such faith was shattered when a global financial
crisis set in as Lehman Brothers went belly up. Senior Korean government
officials and top managers of the central banks were frantic about securing hard
currency.
Now, policymakers are not telling the whole story when they refer to Korea's low
level of national debt. First of all, its actual liabilities are larger than the
Korean public is led to believe.
Excluded from the official amount of "national debt" are the liabilities of
state-owned corporations and government-funded agencies. The total amount of the
public-sector debt doubles when the national debt and the liabilities of the
government corporations and agencies are included. Another problem with the
public-sector debt is the high rate of an increase. As of the end of September,
it stood at 710 trillion won, up 23 percent from a year before.
All the amount of liabilities of the state-owned corporations and
government-funded agencies may not have to be added to the national debt, as the
government insists. But a sizable portion needs to, given that those corporations
and agencies are funding many projects that the government should finance with
taxpayers' money in the first place - including big-ticket infrastructure
construction projects.
South Korea's public finances will look even more vulnerable when the increasing
cost of social welfare and the astronomical cost of unification with North Korea
are taken into consideration. According to one estimate, the cost of unification
alone would range from 937 trillion won ($810 billion) to 1,523 trillion won.
That is the reason why it will not be enough to balance the budget soon. It is
necessary to produce fiscal surpluses year after year and set them aside for a
contingency.
(END)

Delete & Prev | Delete & Next
Move to: