(EDITORIAL from Korea Herald on Nov. 24)

Unequivocal signal

The Korean economy is worsening faster than expected. A growing number of
companies are being forced out of business. Exports, which used to grow at
double-digit rates, are running out of steam.
For a nation whose growth has been driven by ever-expanding exports, a decline in
the shipment of manufactured goods abroad can hardly be imagined. Exports are
meant to expand, never to contract. That is engrained in the psyche of Korean
people.
But what used to be unimaginable is turning into a reality, as evidenced by a
fall in shipments abroad this month. During the first 20 days of November,
exports declined 14.3 percent from a year ago to $17.63 billion.
In October, as many as 321 companies were declared insolvent, the highest since
March 2005, according to a tally by the Bank of Korea. But the actual number
should be much higher, given that the list only included companies using
promissory notes in business transactions.
All these and other distressing developments should be a cause for concern to top
Korean policymakers because they may prove a harbinger of an economic
contraction. Indeed, a UBS AG economist in Hong Kong was quoted on Friday as
saying the Korean economy would shrink 3 percent next year, which, should it
happen, would be the first since the Asian financial crisis a decade ago.
Korea's economic outlook may not be as grim as painted by UBS. Nonetheless, it
was disturbing to hear Finance Minister Kang Man-soo acknowledging on Friday that
growth could fall well below 3 percent. It was all the more upsetting, given that
it was only a few weeks ago that the Korean government revised its 2009 growth
outlook for the second time, this time to 4 percent. It will come as no surprise
if many wonder when the government will revise downward again.
It goes without saying that Korea will have to keep its fiscal and monetary
policies flexible enough to prevent its economy from sliding into a severe
recession. Normally, it would not make sense for the government to spend beyond
its means and for the central bank to print money to boost aggregate demand and
help ailing financial institutions and businesses. But it would be better to take
drastic action now and clean up the mess later than do nothing and let the entire
economy collapse.
In this dire situation, however, a modicum of solace may be found in the fact
that past fiscal prudence makes it possible to finance the launch of additional
big-ticket public works projects. Moreover, the Bank of Korea, which has kept its
benchmark rate high until recently, does not have to worry too much about a
liquidity trap when and if it makes a decision on additional rate cuts.
But many government policies are not working as intended. One case in point is
the proposal to bail out construction companies experiencing a temporary credit
crunch.
The idea is for those companies to sign contracts with their creditor banks on
terms of additional loans and rollovers. The creditor banks have promised to
defer debt payments by one year and make additional loans to companies eligible
for the bailout. But none has applied for support, ostensibly because they are
afraid of being seen as on the brink of bankruptcy.
As this case shows, it is of no use for the government to prod creditor banks to
select viable construction companies and provide them with addition support in
return for self-rescue efforts. It needs to force the restructuring of not just
the construction industry but the financial and shipbuilding industries through
legislation. It was government-led restructuring that pulled the nation out of
the 1997-98 crisis ahead of schedule.
(END)