World Economy

Optimism Hampering South Korea Policy

Optimism Hampering South Korea Policy Optimism Hampering South Korea Policy

South Korea is accustomed to seeing government and economic think tanks lower their economic growth forecasts, but this custom is hampering the right economic policies, according to LG Economic Research Institute.

In June, the South Korean Ministry of Strategy and Finance lowered its economic growth outlook to 3.1% from 3.8%. More recently, Minister Choi Kyung-hwan said even the 3.1% growth seems to be hard to achieve, NewsNow reported.

LGERI economist Lee Geun-tae pointed out that the actual economic growth rates have been falling below forecasts of both domestic and overseas institutes since 2011. The country’s five major economic think tanks, including LG, expected the economy to mark on average 3.7% annual growth between 2011 and 2014, but the actual growth rate stood at a mere 3%.

Of course, there were unanticipated economic shocks that expanded this gap. Lee cited the earthquake in Japan, the Arab spring, the tragic sinking of the Sewol ferry and an outbreak of Middle East Respiratory Syndrome as external shocks that were impossible to forecast. However, their negative impact was not big enough to fully explain the continuous low growth.

“In the case of the Sewol or MERS, the negative impact on the economy was estimated to be at an annual 0.1 to 0.2 percentage points, which doesn’t explain the 0.7 percentage point gap,” he said.

Lee said that the forecasters may be overlooking structural changes. “The current low economic growth Korea is seeing is not a temporary phenomenon. The growth potential in the economy fell for structural reasons,” he said, adding that the manufacturing sector has lost growth potential through the sluggish exports.

He said being optimistic is not always good in economic policymaking. “Positive economic outlooks improve sentiment among economic players such as businesses and households, but if the gap between actual growth and outlook continues, it loses credibility, decreasing the effectiveness of economic policies based on such an outlook,” he said.

What’s worse, it would be difficult to expect the appropriate policies to be pursued if misjudgment on the economy continues. He took Japan as an example. During a long recession, Japan judged that this was due to a temporary contraction of demand. They delayed structural reforms and focused on short-term stimulus measures.

He also took the eurozone fiscal crisis as another example. “South European countries were optimistic about their growth rate and fiscal balance in the 2000s, which led to expansion of state debt and the current account deficit.”

He advised the government to admit it may have entered an era of low growth. “To enhance economic growth, it is crucial to enhance the economy through structural reforms instead of pulling up the rate through stimulus measures,” he said, warning that the government shouldn’t adhere to short-term growth targets.