Powering Ahead
Economic Monitor: South Korea
by Charles S. Lee
Far East Economic Review
April 6, 2000, Pg. 69

Growth: Soaring
Inflation: Subdued
Currency: Appreciating
Trade balance: Weakening

Is there a new economy in the making in South Korea? Just two years after the country's brush with national bankruptcy there's budding talk of a US-style economic renaissance. Gross domestic product is showing double-digit growth with barely a hint of inflation. And the stock market is zooming, powered by a flurry of new hi-tech issues and low interest rates. "South Korea has emerged from the crisis with a complete make-over," SG Securities enthused in a March 14 report, going so far as to anoint the country "the new, new thing in Asia."

Most Koreans wouldn't go that far-yet-but they are once again feeling great about the economy. In 1999, GDP expanded 10.7% after shrinking 5.8% the year before. Most forecasters expect at least a 6 % growth rate for 2000. Indeed, Seoul's main challenge this year is how to extend the good times without triggering inflation.

"The government has to make sure the economy doesn't overheat." warns Cho Dong Chul, a macroeconomist at the Korea Development Institute, a state-funded think-tank. "It's better to apply the brakes gradually now rather than suddenly later."

Inflation hawks have reason to be worried. After two months of slowdown, industrial-output growth accelerated to 28.1% year-on-year in January from 24.6% in December as the nation's factories ran at 80 % of capacity. The growth in output was faster than expected and has buttressed the view that the economy is growing too fast for its own good.

So far, however, inflation figures don't bear this out. Consumer prices increased by only 1.6% in January from a year earlier and just 1.4% in February--in spite of the rise in oil prices, usually a sure inflation trigger. The government appears split on what to do. On February 10, the central bank defied the Finance Ministry and raised overnight call rates, levied on lending between banks and secondary financial institutions, to 5% from 4.75%. The move was ostensibly aimed at narrowing the gap between short-term interest rates and long-term ones, which hover around 10%.

Seoul's official stance is that there will be no further tightening without clear evidence of imminent inflation. Some analysts, however, suspect the Kim Dae Jung administration is fishing for votes in elections set for April 13. By keeping interest rates low and economic output high, they reckon, the government hopes to protect the high-flying stock market and lower the 5.3% unemployment rate.

Policymakers are more concerned about what's happening on the external front. After chalking up a surplus for 26 months straight, the trade account turned negative in January with a $391 million deficit. Although February saw a return to surplus (of $802 million), the government is treating the reappearance of the trade deficit as something of a national emergency. One counter-measure Curbing the appreciation of the won-which has strengthened to about 1,120 to the U.S. dollar--to safeguard the country's export-price competitiveness.

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