"Simultaneous Stabilization of Employment and Wages Impossible... Government Leadership Is Crucial"

Economic Crisis, The Way Out ① Kim Kyungsoo, Honorary Professor at Sungkyunkwan University (Former President of the Korean Economic Association)

When the economy suffers a major shock

Unemployment makes reemployment difficult

Companies should maintain employment, but

wage readjustment is inevitable

Social consensus and government decision are necessary

The novel coronavirus disease (COVID-19) has plunged the global economy into crisis. In response, governments and central banks worldwide are rushing to implement unprecedented measures, yet market anxiety persists. Even government authorities are concerned that the downturn could surpass the International Monetary Fund (IMF) foreign exchange crisis and the 2008 financial crisis. Asia Economy diagnoses the current situation through experts in various fields and seeks solutions to overcome the crisis.

Professor Kyungsoo Kim, Department of Economics, Sungkyunkwan University / Photo by Jinhyung Kang aymsdream@

The coronavirus that began in China at the end of last year has now become a global pandemic sweeping across the world. Most countries have imposed lockdowns not only on borders but also on some cities, and the economy has come to a halt. Various theories from experts make it difficult to predict when this situation will end.

The pandemic has taught us three lessons. First, bad news is better than no news. An increase in confirmed cases means more infected people have been identified, and this trend provides useful information about the situation going forward.

Next, the more actively we respond to the virus, the more the economy contracts. The stricter the social distancing, the more economic activities are suppressed, reducing both consumers and producers. Considering that the global supply chain is the core of international trade, and that our country, with a high export dependency (40% of GDP), cannot avoid the pandemic's ripple effects. However, on the other hand, the more lax the response to the virus, the greater the crisis and the exponentially increasing costs to be borne. Failure to respond properly at the initial stage or complacency will turn a problem that could be stopped with a hoe into one that requires a plow to fix.

The current situation can be described as the real economy clock having stopped, but the financial economy clock continuing to run. The pandemic blocks smooth cash flow for companies, but salaries for employees, payments for various expenses, and loan repayments must still be made. Self-employed individuals and small business owners must pay rent and utilities even if their businesses are temporarily closed. Therefore, unless the situation improves, it is inevitable that companies with high debt and insufficient cash will go bankrupt, and unemployment will increase.

According to the financial stability report released by the Bank of Korea at the end of last year, corporate profitability has declined, especially among large companies, and the interest coverage ratio (operating profit/interest expense), an indicator of interest payment ability, has dropped to half of what it was a year ago, notably in sectors such as electronics, construction, and petrochemicals. Corporate performance is a direct parameter of a company's debt repayment ability and is reflected in credit ratings.

Domestic and international credit rating agencies have given more negative outlooks than positive ones for credit ratings over the next 1-2 years. It is clear that the pandemic will further deteriorate the financial soundness of companies already weakened by the US-China trade war and other factors.

On the 24th, the government announced it would inject 100 trillion won (5.2% of 2019 GDP), double the initially planned amount, into a livelihood financial stabilization program for corporate funds and financial market stability. Policy financial institutions will proactively supply 58 trillion won in corporate funds from self-employed individuals to large corporations, and 42 trillion won will be raised to stabilize the bond and securities markets, support short-term money market stability, and assist in the issuance of asset-backed securities. These measures can be summarized as easing corporate cash flow and serving as a safety net for financial markets. In particular, the currency swap with the US Federal Reserve (Fed) has provided the Bank of Korea with an opportunity to further strengthen its financial backstop.

Considering that the current crisis stems from the pandemic, the livelihood financial stabilization program cannot be expected to stimulate the economy. The success of this program depends on how quickly funds are injected where needed and how actively the injected money is reused. Its expected effect lies in repairing the stopped real economy clock without completely breaking it and slowing down the financial economy clock as much as possible to minimize the economic ripple effects of the pandemic crisis.

Meanwhile, how much of the 100 trillion won to be injected can be recovered is also crucial. If privatization of profits and socialization of losses occur, the value of this fund will be greatly diminished. Monitoring is necessary to check whether the injected funds are being used properly. If the pandemic crisis continues, the following Plan B can be considered.

Post-global financial crisis, strengthened soundness regulations on banks and other financial institutions may concentrate corporate credit risk in the financial sector, potentially causing negative ripple effects on the entire economy. Therefore, temporarily relaxing bank soundness regulations is necessary to prevent corporate credit risk from concentrating on one side and to spread it evenly across the financial sector.

When the economy suffers a major shock, unemployment has the characteristic of making reemployment difficult. Therefore, from the perspective of the national economy, it is desirable for companies to maintain employment despite difficulties. However, stabilizing both employment and wages is impossible. For employment stability, wages must be readjusted. This requires social consensus, and government leadership is requested here.

In the political arena, the government is being urged to provide transfer payments (such as disaster basic income and cash payments) to all citizens. The problem is the possibility that, for any rational reason?whether to repay debt, prepare for a prolonged crisis, or maintain social distancing?the money received may not be spent. If the money received is not spent or is spent less, it will not meet the initially expected effect. Therefore, it is better to provide vouchers instead of cash.

This content was produced with the assistance of AI translation services.