S. Korea likely to recover earlier than peers: scholar

WASHINGTON, Dec. 23 (Yonhap) -- South Korea will be able to recover from the current economic crisis earlier than its competitors if it successfully boosts domestic consumption with tax cuts and deregulation, scholars here suggested Monday.

"If Korea's management of the crisis is sound, it will recover earlier than peer
economies, which will boost its global competitiveness in the short-term," said
Derek Scissors, a research fellow at the Heritage Foundation's Asian Studies
Center. "Longer-term plans will depend on which Korea companies and sectors best
demonstrate their worth during this difficult period."
In an e-mail interview, Scissors urged South Korean policymakers to "give people
greater purchasing power and employers greater ability to retain and hire,"
saying the key for South Korea is "lower taxes on consumption and, to a lesser
extent, employment."
Both South Korea's central bank and the International Monetary Fund forecast
recently that the country's economy will grow 2 percent next year, down from its
earlier prediction of 3.7 percent and 3.5 percent growth respectively, citing
slumping exports and domestic consumption affected by the global financial
crisis. South Korea's economy grew 5 percent last year.
The Bank of Korea said the nation's economy will begin picking up in 2010 with a
possible annual growth of 4 percent.
The IMF had said Asia's economy will likely begin recovering in the second half
of next year on the condition that Asian policymakers take "quick and decisive
actions" such as easing monetary policy and pursuing economic stimulus measures
to respond to heightened financial risks and slowing domestic activity.
"The mistake Korea and China must avoid is believing that production levels
should be kept high while consumption levels drop," Scissors said. "This will
produce deflation."
The scholar called for South Korea's economic stimulus to be directed at
consumers, not producers, saying, "It is foreign consumption that has been lost,
not foreign production."
"If prices fall, consumers will prefer to save, even while consumer spending at
home is desperately needed to compensate for the loss of foreign demand," he
said.
Responding to questions by e-mail, J.D. Foster, senior fellow in the economics of
fiscal policy at the Heritage Foundation, also urged South Korea to reduce taxes
and deregulate to help boost the struggling economy.
"To best prepare for the future, policymakers should focus on creating a business
environment in which investors and businesses can best recognize and react to new
opportunities and challenges," he said. "Such an environment requires a minimal
regulatory burden and low marginal tax rates on business investment."
Foster said that the U.S. "is likely to be the first major country to recover
because its markets, especially its labor markets, are generally more flexible
and adaptable than those found in other countries."
He predicted that the recovery "will likely start around mid-summer of 2009" for
the U.S. economy "assuming no further major shocks," with the rest of the world
likely follow suit "country by country or region by region rather than as a
single entity."
Scissors blamed the slow recovery on the fact "while the global economy was
already struggling somewhat as early as autumn 2007, the full weight of the
financial shock is only three months old."
"It would be unusual for the impact on the real economy on a global scale to be
fully felt in only three months," he said.
hdh@yna.co.kr
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