[The Editors' Verdict] Overcoming the Risks of Uncertainty Through Innovation

Next year, the economy of most countries, except the United States, is expected to decline. Domestic and international research institutions forecast that the global economic growth rate will fall compared to this year, and inflation will initially be high but will stabilize. South Korea is expected to follow a similar trend. The Korea Development Institute (KDI) predicts an economic growth rate of 3%, with inflation (below 2%) and employment growth (300,000 people) also slowing down. Although export growth is expected to decelerate, as COVID-19 subsides, inflationary pressures will ease, and the service sector, which drives the domestic economy, is expected to recover. However, if COVID-19 resurges as it is now, inflationary pressures and domestic economic stagnation could be prolonged. The slowdown in export growth could also be greater than expected. China accounts for more than 20% of South Korea’s exports, but China is confronting the United States and strengthening its socialist policies. As China’s economic downturn deepens, South Korea’s exports to China may perform worse than anticipated.

Next year’s economy is likely to be characterized by recession concerns and increased uncertainty. In addition to COVID-19, there are risks from China and the presidential election. The Chinese government prioritizes stability over growth and emphasizes common prosperity (living well together). It is expected to respond to export slumps and economic downturns caused by external isolation with interest rate cuts and fiscal expansion. In South Korea, policy directions will vary significantly depending on the presidential election outcome. Although candidate Lee Jae-myung claims to differentiate himself from the Moon Jae-in administration, his experimental policies such as basic income and land ownership tax suggest a greater economic shock than the previous government. Candidate Yoon Seok-youl criticizes the current administration but lacks clarity on what and how to change, which could lead to policy confusion even if there is a regime change.

Every crisis is accompanied by a recession. Countries worldwide have postponed the recession caused by COVID-19 through fiscal expansion and ultra-low interest rates, but next year this will no longer be possible. Inflation is too severe, forcing liquidity reduction through tapering (asset purchase reduction) and interest rate hikes, and fiscal conditions have deteriorated too much to avoid normalization. For these reasons, economic deterioration next year is inevitable, and the possibility of stagflation (inflation amid recession) is increasing. Naturally, new remedies are needed. Whenever South Korea has faced a crisis, the government innovated policies, companies innovated management, and citizens innovated household practices to find breakthroughs. The first oil crisis in the 1970s was overcome by expanding into the Middle East, the second oil crisis by economic liberalization and restructuring. The 1997 foreign exchange crisis was overcome by exports to China and gold collection, and the 2008 global financial crisis was resolved through international cooperation including the Korea-US currency swap and partnerships with Japan.

The key to overcoming the risks of recession and uncertainty lies in innovation. Innovation is diverse and extensive, covering production technology, market expansion, and international cooperation. However, government leadership innovation is commonly required. Let’s offset the slowdown in manufacturing exports with strengthened service exports. Reducing regulations on industries such as gaming, entertainment, and healthcare will increase jobs. Private sector investment stagnation can be revitalized through privatization of public enterprises and diversification of businesses by privatized companies. Public enterprises related to eco-friendly energy and mobility attract significant private capital interest. Self-employed and small business owners should transition to the platform economy to find breakthroughs amid the decline of face-to-face services. Digital education is needed to expand markets beyond regions to nationwide and even overseas. COVID-19 loss compensation should be transformed into disaster support, and disaster support should be elevated to disaster recovery by packaging long-term loans, education, training, and consulting.

Kim Tae-gi, Professor of Economics, Dankook University

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