[Viewpoint] The Delta Variant and Stagflation

Suh Yonggu, Dean of the Graduate School of Business, Sookmyung Women's University

This year, the government's projected economic growth rate is in the 4% range. Considering last year's -0.9%, the recent two-year average growth rate has been a low 1.5%. Most personal service industries and self-employed sectors, excluding the IT platform industry and export industries, appear to be experiencing continued negative growth. The problem is that while the exit from the Delta variant seems uncertain, inflation is beginning to accelerate.

Recently, the rise in apartment prices and jeonse (long-term lease) prices has reached record levels, significantly increasing housing costs. Electricity and milk prices have already risen, and further increases in public utility fees such as city gas and public transportation are anticipated. If public utility fee hikes materialize, the annual inflation rate is expected to approach 2%. The 11 trillion won disaster relief fund and credit card cashback policies released into the market will certainly stimulate consumer prices. The fear of stagflation is gradually growing.

Stagflation is a term combining stagnation, meaning economic recession, and inflation, meaning rising prices. It can be recalled from the first and second oil shocks of the 1970s and Japan's 30-year long-term economic stagnation. During recessions, prices fall, and during booms, prices rise. However, since the New Normal, the global economy has experienced sustained low growth and low interest rates, and then encountered the pandemic, a 'black swan' event, leading to unprecedented quantitative easing. The fundamental cause of stagflation is the expansion of quantitative easing and consumption-driven fiscal spending. To escape the concerns of stagflation, where the value of money continuously declines, three measures to restore the Korean economy to a path of sustainable growth are considered.

First, technological innovation must be further promoted. Technologies held by leading industries such as semiconductors, batteries, and shipbuilding should be further developed into 'super-gap' technologies, and continuous support and encouragement should be provided to various startups promoting the Fourth Industrial Revolution and platform-based economies such as applications (apps). If technological innovation can reduce costs and create new demand, the risk of stagflation can be lowered.

Second, regulations on businesses must be promptly eased. The only economic agents capable of continuously creating quality jobs now and in the future are 'companies.' Governments, local authorities, civic groups, and non-profit organizations should rationalize personnel and budgets and work to solve social problems through cooperative governance with companies. The world is currently in a platform war. The U.S. has Google, Amazon, Facebook, and Apple; China has Baidu, Alibaba, Tencent, and Huawei; and Korea has platform companies such as Kakao, Baedal Minjok, Coupang, and Naver. These companies must grow further to compete with American and Chinese firms in large overseas markets like Vietnam and Indonesia.

Third, connections with overseas markets must be further strengthened. Korea has historically relied heavily on manufacturing and exports, but the limits of this approach are now clear. Going forward, platform businesses, inbound tourism service industries, and overseas-linked projects mentioned above should be added to diversify the factors driving Gross Domestic Product (GDP) growth. Korea's soft power has recently surged, with approximately 3 billion MZ generation (Millennials + Generation Z, born between the 1980s and 2000s) consumers worldwide wanting to visit Korea. If 30 million overseas travelers visit Korea annually, the current GDP growth rate could be increased by more than 1 percentage point. Korea's globalization must be accelerated.

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