By Chang Se-moon
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There is a wide-spread concern over a possible slowdown of the world economy. Today, I will explain what may lie ahead for the global economy and suggest what policymakers in Korea may want to do to prepare for the likely slowdown.
The CESifo Group, comprised of the Center for Economic Studies (CES), the Ifo Institute, and the Munich Society for the Promotion of Economic Research, is a group in Europe specializing in economic research. The services of the CESifo Group include the quarterly World Economic Survey, which is conducted in cooperation with the International Chamber of Commerce in Paris (ICC).
The survey, which was started in 1989, correctly foresaw the beginning and ending of the 2009 Great Recession.
The latest survey was conducted in July 2019. Responses for this third quarter 2019 predictive survey were received from 1,173 experts in 116 countries, which included myself representing the U.S. economy. My review of the world economy in this article is based entirely on the Aug. 12 report released by CESifo.
The economic survey consists broadly of three categories: climate, current situation and future expectations. According to the report, “The economic climate deteriorated in all regions. In the advanced economies and in Asia’s emerging and developing economies, experts have revised both their assessment of the situation and expectations downwards.”
For the near future, the report also found significantly weaker growth in world trade, weaker private consumption, lower investment activity, and declining short- and long-term interest rates.
Actually, past survey results indicate that the economic climate has been negative since the fourth quarter of 2018, while future expectations have been negative since the third quarter of 2018. Only the “current” situation had been positive, albeit barely, until the second quarter of this year, but moved into the negative category for the third quarter of 2019 survey.
In retrospect, the survey findings have been prophetic, correctly predicting about a year ago that the world economy had not been in recession then, but has been trending downward.
In terms of broad regions, findings for the next six months are the following. For advanced economies in general, the economic situation, exports and imports are all predicted to decrease. For the 28 countries of the European Union, the economic situation and exports are predicted to decrease, while imports are likely to remain the same.
For the G7 countries, which refer to Canada, France, Germany, Italy, Japan, the United Kingdom and the United States, the economic situation, exports and imports are all predicted to be lower for the next six months.
For emerging and developing countries, changes are predicted to be relatively small in the direction of a slowdown in all three. The only region that shows positive growth in the three indicators is Latin America.
To summarize the latest survey results, the world economy in the near future is predicted to slow down and experience significantly weaker growth in trade and private consumption, lower investment activity, declining short- and long-term interest rates, and falling imports and exports.
Looking back, it is widely agreed that the Tariff Act of 1930 in the United States, which is known as the Smoot―Hawley Tariff Act or Hawley―Smoot Tariff Act, played a large role in starting the Great Depression. The Tariff Act, signed by President Herbert Hoover on June 17, 1930, raised U.S. tariffs on over 20,000 imported goods, lowering American exports and imports by more than half during the Great Depression.
Similarly, the concern of many economists today relates to global dispute on tariffs that are casting dark clouds over world trade and the global economy. The danger compounds when higher tariffs are promoted through nationalism or patriotism.
Accepting that the reality is beyond the control of Korea, and many other smaller economies for that matter, what should Korea do?
As Seoul heavily depends on exports for its economic vitality, it will be impossible for Korea to remain unaffected by the slowing world economy. Korea, however, can minimize the negative impact on its own economy.
The key is to maximize the flexibility of the business community.
Excessive regulations on the business community through the rapid increase in the minimum wage, the requirement of a 52 hour workweek, the sharing of corporate profits with supplier firms, retaliatory audits of corporate profits, and price control in selected sectors, if continued, will greatly exacerbate the already-slowing Korean economy.
Blind support of organized labor and the banning of imports and exports from and to neighboring countries that negate comparative advantages will also make the negative impact of the slowing world economy on Korea worse.
The Korean economy, already slowing, will be in very difficult position as the world economy slows down, unless the business community is set free of excessive and counter-productive measures currently put in place by the Moon Jae-in administration. Although it may not be easy to reverse policies, Korea would soon appreciate the reversal.
Chang Se-moon (changsemoon@yahoo.com) is the director of the Gulf Coast Center for Impact Studies.