(EDITORIAL from the Korea Herald on March 16)

Brace for worse

Nothing better shows the severity of Korea's economic crash than the 2009 outlook
for per capita gross domestic product - $5,000 less than the 2007 peak of
$20,000. This spells unendurable hardship for many low-income households.
According to an estimate by Woori Financial Holdings, the 2009 per GDP will be
$14,690, assuming growth stands at minus 4 percent, the GDP deflator at 2.1
percent, and the annual average exchange rate at 1,300 won per U.S. dollar.
The per capita GDP figure may not be far off the mark, given that the Woori
assumptions are far from unrealistic. Take the growth estimate for example.
A 4-percent contraction is the latest revision by the International Monetary
Fund. True, the IMF figure is lower than the official estimate of the Korean
government, which says the economy will shrink 2 percent this year. But the
government does not rule out the possibility of sustaining a larger contraction.
Nor is the exchange rate forecast unreasonable. The Korean currency, which is
much weaker at the moment than the Woori estimate suggests, is expected to gain,
given that Korea is projected to produce a sizable current account surplus this
year.
Should the economic conditions turn for the worse, per capita GDP will be much
smaller. Indeed, some foreign financial institutions are more pessimistic about
the Korean economy's performance than the IMF. Nomura Securities, for instance,
predicts a 6 percent contraction.
If the Korean economy shrinks 4 percent this year, an additional 1.2 million
Koreans are projected to fall below the poverty line - the minimal level of
income deemed necessary to maintain an adequate standard of living.
That is why the Korean government will have to strive to draw the line at falling
below its growth projection. At the same time, it will also have to strive to
protect those who fail to provide themselves with an adequate standard of living.
It is easier said than done, given the exorbitant cost of slowing the slide into
recession. According to one estimate by the Korea Institute of Public Finance,
the cost of cutting the rate of contraction by 1 percentage point will range from
8 trillion won to 20 trillion won ($5.4 billion to $13.5 billion), depending on
the focus of additional spending.
But an increase in fiscal spending is the only way out of the worsening crisis.
There are few viable alternatives, given that the central bank finds it
impossible to make a deep cut in its benchmark interest rate, which it has kept
at a historical low of 2 percent since last month.
The administration is working on a supplementary budget bill, which is reportedly
scaled at 30 trillion won. This should be a conservative ball-park figure for the
cost of halting this year's contraction at 2 percent, instead of allowing it to
go down to 4 percent or even lower.
Thirty trillion won is truly an astonishingly large amount for a supplementary
budget. As such, the "super spending bill" should be a cause for concern for the
main opposition Democratic Party. But in the absence of viable alternatives, the
opposition party will find it difficult to demand a cut in the size of the
supplementary budget when deliberations start next month.
The amount of additional fiscal spending is not as large as it looks, given that
the bill needs to cover an anticipated 10 trillion won shortfall in this year's
tax revenues. Moreover, 6 trillion won of extra spending is earmarked for the
opposition's main electoral base - low-income households. A more sensible
approach for the opposition would be to scrutinize the areas to which the money
is allocated and to demand changes if necessary.
(END)