Trend of the Global Economy and Sino - Korea Economic Cooperation

 

A keynote address at the meeting of the Sino-Korea Intellectual Exchange Program held at Beihai, China, Ocotober 17-19, 1994.

 

Slowdown of the World Economy

               Following a period of economic expansion in the second half of the 1980s, the industrialized countries have experienced an economic slowdown since 1990, and the economic outlook for the current year is not very encouraging. The IMF has recently revised downward its projection for the growth rate of world output for 1993 to 2.2 percent from the original 2.5 percent. A low growth of 1.1 percent is projected for OECD countries, 0.3 percent down from the original forecast. A much better growth rate of 6.1 percent is projected for developing countries. Economic stagnation in the former centrally planned economies is expected to continue, with GNP declining another 10.2 percent this year on top of the 15.4 percent negative growth in 1992.

Global trade volume is expected to grow by only 2.7 percent this year. The rate of inflation (consumer price index) has been relatively low-around 3 percent in industrialized countries-while developing countries are still characterized by a high rate of inflation-around 40 percent on the average. An alarming rate of inflation persists in the former centrally planned economies, averaging 786 percent in 1992 and an estimated 581 percent expected for this year.

What, then, are the major factors explaining the current slowdown of the world economy? The situation differs from country to country, compounded by cyclical and structural as well as circumstantial events. Yet the major problems facing the world economy today may be discussed under three broad headings: (1) aging economies in the industrialized world, (2) economic chaos in the former communist countries, and (3) absence of effective coordinating mechanisms in spite of the increasing interdependence among countries both regionally and globally.

Aging Economies

One of the major characteristics of aging economies in the industrialized world is found in what is called "debt deflation," which may be viewed as a structural problem in the sense that it is rooted in the long-term accumulation of debt by households, businesses, and the government. To cite a typical example in the United States, the ratio of household debts to the asset value of housing units rose from 37 percent in 1980 to 57 percent in 1990. This has the effect of dampening consumer confidence and restraining the household from spending. As for the business sector, the ratio of long-term debt to equity capital rose from 25 percent to 42 percent in the same period, with the consequence that additional capital, if any, tends to be absorbed by debt amortization rather than going into new investment. The fiscal debt of the U.S. government outstanding in 1990 was equal to 59 percent of its GDP as compared with 34 percent in 1980; the fiscal deficit for the single year of 1992 alone was equal to 4.8 percent of GDP. With the heavy burden of amortization cost, the U.S. government has little room for public investment to stimulate economic recovery. Moreover, the debt economy has rendered the monetary policy of the government almost ineffective. In spite of a series of reductions of the federal discount rate to the level of 3.0 percent-the lowest since 1960s-it has had only limited effect in easing the "credit crunch," and in increasing consumer spending and investment expenditures.

Debt deflation is not confined to the United States. It also characterizes the economies of Britain, the Nordic Countries, and Australia. Although similar situations could be found in Japan, South Korea, and Taiwan in recent years, the Asian experience is more that of a cyclical rather than a structural nature. In these countries, the business community and rich individuals indulged in speculative purchase of real estate and securities at home and abroad during the second half of the 1980s, largely inspired by mounting trade surpluses. It was to be foreseen that the speculative "bubble economy" would inevitably collapse sooner or later. In fact, many business firms and banks are currently saddled with falling asset prices and rising debt, contributing to the economic slowdown in those countries. On top of that, Japanese industries are currently suffering from the sharp appreciation of the yen, which rose from 75 cents per 100 yen (or 134 yen per dollar) in 1990 to about 95 cents (or 105 yen per dollar) at present.

Debt is, of course, a result of spending beyond its means-whoever is concerned-and this relates to the second characteristic of the aging economy: People generally demand a higher living standard in spite of falling productivity of their industries. Put differently, people want to work less for higher pay and save less today for a better tomorrow. Moreover, the age composition of the population in developed countries has been changing in favor of aged people, meaning that the society has to pay increasingly more to take care of them in return for their diminishing or noncontribution to the national output. One result is that business firms tend to shift production to developing countries to take advantage of low-cost labor when business conditions are good, and lay off workers when business conditions are bad. It is no wonder that unemployment in the industrialized nations has reached "intolerable levels," with 32 million workers jobless-9 million more than only three years ago, as reported by the IMF.

This situation could be avoided if economic innovation proceeds fast enough to compensate for the rising cost of labor and social amenities. However, the problem is that demand for conventional products such as radios, cars, and color TVs has reached a saturation point, while the breakthroughs in technology for new products have yet to come to bring about a new wave of investment and mass consumption. Furthermore, following the demise of the Cold War, defense expenditure for aircraft, naval ships, and high-tech weapons, which all have a high linkage effect on industries, has been curtailed sharply in the major countries, with depressing impacts on production, investment, and employment.

Economic Chaos in the Former [[Command]] Communist Economies

Turning to the economic situation in the former centrally planned economies, the horrendous economic setbacks in the course of economic reform in those countries have had an adverse impact on the world economy, not to mention the grave hardships inflicted upon their people. For example, Russian exports fell by 25 percent and imports by 21 percent in 1992, and imports further deceased by 49 percent in the first half of this year.

On the other hand, German reunification has had a both positive and negative impact not only on the German economy but also on the EC economies as a whole. Following reunification, the German economy boomed for a time largely owing to the additional demand generated by the rapid expansion of government spending to finance the unification programs. However, the German economy, growing at a pace of 6 percent during the second half of 1990 through the first half of 1991, became overheated, accompanied by rising prices and wage rates, and above all, a sharp rise in the short-term interest rates. One study shows that Germany's economic boom spilled over to other European countries, adding to their growth rates by 0.5 percent on the average.

Meanwhile, the high interest rates in Germany posed a great difficulty for the EC countries in maintaining their commitment to concerted monetary policy under the European Monetary System (EMS). The efficacy of high interest policy in the wake of deepening recession was questioned, even as the policy brought about instability in foreign exchange markets. The United Kingdom and Italy finally decided to drop out of the EMS temporarily in September 1992. All told, the high interest rate policy in Germany and the resulting instability in the foreign exchange market has been an important factor contributing to the prolonged recession in the European economy.

Lack of Coordination

Turning to the problem of the absence of an effective coordinating mechanism in the presnt world economic system, the experience of currency misalignment in the EC just cited above is only one example among many of the failure of intergovernmental policy coordination. As we all know, international macroeconomic coordination is carried out by the major industrialized countries through the G7. There is, however, widespread doubt as to whether commitments undertaken in the context of the G7 are really credible; that is, to what extent are countries willing to sacrifice macroeconomic autonomy for the sake of coordination?

More than seven years have elapsed since the Uruguay Round was launched in September 1986. Yet the prospects for a successful conclusion of the Round by the end of this year remain uncertain. The principle of nondiscrimination, which has been the basis of multilateral trade negotiation in the past three decades, is giving way to the principle of reciprocity under the emerging regionalism represented by trading blocs such as the EC Single Market, NAFTA, AFTA, and others. The chronic problem of large trade imbalances between countries-especially between Japan and the United States-remains unresolved, fueling trade disputes and escalation of protectionist policies on the part of deficit countries.

These situations all point to the need for more effective mechanisms for international economic policy coordination. The problem is that we can find no single or collective leadership that can make such mechanisms work. The three major poles of economic might-Europe, Japan, and the United States-each have a weakness that prevents it from playing an effective leadership role in forging a new economic order. The economic integration in Europe has preceded political integration, with the result that negotiations of enormous importance to the global economic order are often blocked by parochial domestic interest groups. Japan still behaves as if it were a developing country whose actions are of marginal importance to the rest of the world. The United States has maintained its self-image as global leader, although it is increasingly without the wherewithal to play the part.

It follows from the foregoing observations that the prospects of economic recovery in the industrialized countries and in the former centrally planned economies is not very bright at least for the next few years, if not longer. Yet, from a longer-term perspective, the world is filled with enormous opportunity. Economic reforms in the former centrally planned economies and the spread of liberal ideas throughout the Third World are creating preconditions for billions of people to reenter the global market, while technological advance and structural changes in the industrialized world will continue, perhaps opening the second great age of capitalist development. In particular, East Asia will continue to be the single most dynamic spot in the world economy, providing the megamarket of the twenty-first century.

Implications of Sino-Korean Economic Cooperation

What, then, are the implications of the foregoing observations on the world economy for economic cooperation between South Korea and China? Currently, both countries are facing some economic difficulties of more or less different nature, requiring adjustments in economic management. In the wake of the deteriorating international economic environment, Korea is experiencing a short-term recession. Exports grew only 6 percent in the first eight months of this year over the same period last year. The Bank of Korea has recently revised its projection for the GNP growth rate for this year to 4.7 percent from the original 5.7 percent. This revised figure, along with last year's 4.7 percent, is the lowest since 1980, in which a minus 3.7 percent growth was registered. The consumer price index rose 5.5 percent up to the end of August, indicating some inflationary pressure.

The needed adjustment in the Korean Economy includes: speeding up expansion of social infrastructure to ease congestions in transportaion and harbor facilities; developing new products through technological innovation, reorientaion of government policies toward a more open and liberal economy, particularly in the areas of trade and finance; and restructuring agriculture.

The Chinese economy is the only notable exception to the general slowdown in the world economy. Following a 12.8 percent growth in 1992, an even higher rate of 13.9 percent was recorded for the first half of this year, according to a Chinese news report. Obviously, such high growth rates cannot be sustained without accompanying price inflation and deterioration in the balance of payments.

Major challenges confronting the Chinese economy appear to include: wide economic fluctuations due to the weak adjustment mechanism in macroeconomic management, which is in turn attributable to the incomplete economic transformation to the market system; the growing economic disparity between the east coastal areas and the inner provinces; low efficiency of government enterprises and the financial system; and severe bottlenecks in public facilities, including means of communication and transportation.

Given the high degree of economic complementarity as well as geographical and cultural proximity that exist between our two countries, there are undoubtedly many things that both countries can do together to cope with their domestic economic problems as well as to meet challenges resulting from the changing conditions in the global economy. What is most important here is that the governments of the two countries make maximum efforts to eliminate unnecessary barriers on both sides that hinder the flow of goods and services between the two countries. This task is not very difficult if officials of our two countries try to identify those barriers and bring them to the conference table on a regular basis for discussion on how to eliminate or reduce them for our mutual interest.

In responding to challenges from the outside world, it is important to realize that preservation and strengthening of the open liberal trade system is in the interest of our two countries as well as others. Given the great need for foreign resources including goods, services, capital, and technology, our two countries are likely to gain more from a liberal rules-based trade system than from the pressure-oriented system of bilaterally negotiated outcomes. In this light, the best option for China would be accession to GATT, while a successful conclusion of the Uruguay Round is essential for Korea.