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THE Post-crisis Course OF THE Korean Economy:Challenges AND Tasks IN THE NEXT Decade

THE Post-crisis Course OF THE Korean Economy:Challenges AND Tasks IN THE NEXT Decade

KIM Yong-Ki

Feb. 28, 2011

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Originally released on December 22, 2010

Despite Korea's comparatively fast recovery from the shock of the global economic crisis, Korea's GDP growth rate has yet to rebound to pre-crisis levels. From the fourth quarter of 2008 to the third quarter of 2010, average quarterly GDP loss versus the previous long-term trend line was 5.7%. As in the Asian financial crisis of 1997, when the Korean economy fell below its projected long-term growth trend, Korea has again failed to restore its pre-crisis growth profile.

Although Korea was not at the epicenter of the most recent global financial crisis, there can be no doubt that its economic volatility has increased significantly. Korea ranked 9th among 33 OECD countries in the volatility of its economic growth (as measured by standard deviation) from the fourth quarter of 2007 to the first quarter of 2009, while instability of financial markets was also very high on fluctuating stock prices and exchange rates. Future conditions will not necessarily be favorable for the Korean economy.

The next 10 years will be a transition period during which the global imbalances of the pre-crisis years will be rearranged. The two decades (1987-2007) prior to the global economic crisis was the period of the "Great Moderation," where the world economy enjoyed high growth and low inflation. Behind this, however, were asset bubbles spawned by excess liquidity and loosened financial regulations, as well as expanding imbalances between current-account deficit countries like the United States, United Kingdom, Spain, and Ireland and current-account surplus countries like China, Germany, Japan, and Korea after the currency crisis. The next decade thus must be a time to resolve the cumulative global imbalances of the "Great Moderation," and to normalize the emergency fiscal and monetary measures taken during the global crisis. The underlying condition of the world economy, however, is likely to remain persistent low growth and increased competition among nations. In Korea, low growth is li kely to exacerbate socio-political conflict over the share of different groups in the national economy.

In the face of challenges like a deteriorating export environment outside and mounting internal conflict, the Korean economy is now faced with multiple tasks in preventing future crises and restoring GDP growth to pre-crisis trends. To accomplish these tasks, stable growth strategies that raise potential growth and reduce GDP volatility will be critical. "Stability" as mentioned here means more than "price stability," and includes matters like stability of employment and future income as well as reduction of GDP volatility. With the rise of stability comes an increase in the long-term growth rate.

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