[2022 Roundtable] "The First Year of Global Transformation... Digital Revolution to Lead Growth Momentum"

Kwon Tae-shin, President of Korea Economic Research Institute
Kim Heung-jong, President of Korea Institute for International Economic Policy
Shin Jin-young, President of Korea Capital Market Institute
Lee In-ho, Professor, Department of Economics, Seoul National University

[Summary=Asia Economy Reporters Kim Hyunjung, Kim Heungsun, Jang Sehee, Lee Minji] As we enter the third year of the COVID-19 pandemic in 2022, what changes will the domestic and global economic and industrial structures undergo? The global economy, having suffered devastating blows to face-to-face service industries and experienced rapid expansion of the non-face-to-face market over the past two years, is now sitting on a rollercoaster. Before concerns about deflation (economic recession) have fully dissipated, there is a need to resolve inflation (economic overheating) caused by pandemic responses. To foresee the rapidly changing domestic and international economic situation, Asia Economy held a special paper-based roundtable considering COVID-19 quarantine conditions, discussing economic policy issues and the current government's tasks approaching the end of its term with Kwon Tae-shin, President of the Korea Economic Research Institute; Kim Heung-jong, President of the Korea Institute for International Economic Policy; Shin Jin-young, President of the Capital Market Research Institute; and Lee In-ho, Professor of Economics at Seoul National University (in alphabetical order).

The experts agreed that the key economic themes this year will be macro changes such as normalization and major transitions, alongside digital revolution leading growth. President Kim (hereafter Kim) diagnosed, "From this year, we will follow a path where mid- to long-term structural improvements become visible," calling it "the first year of a global major transition." President Shin (hereafter Shin) emphasized, "The key keyword driving the major flow of our economy this year is the 'speed of normalization.'" Shin predicted, "Interest rates, global supply chains, and normalization of daily life will be achieved, which will significantly affect global financial markets and economic trends." Both President Kwon (hereafter Kwon) and Professor Lee (hereafter Lee) commonly forecast rapid growth in digital-related industries, while expecting low-carbon and eco-friendly sectors and platform industries, respectively, to act as growth drivers.

"Global supply chain issues will be resolved by mid-year"

-The U.S. is accelerating tapering (asset purchase reduction). What impact will this trend have on South Korea's macroeconomy, capital markets, industry, and trade?

▲Kwon: With major countries shifting to tightening monetary policies, concerns arise over liquidity reduction and consequent real economy contraction. The government needs to guide a soft landing of asset prices by adjusting the pace of interest rate hikes. Careful monetary policy management is necessary.

▲Kim: Compared to global monetary policy trends, the Bank of Korea has preemptively raised its base interest rate among advanced countries. The Bank of Korea's legal duties include price stability and financial stability. It was necessary to respond to overheating in asset markets, including real estate, and the related increase in household debt. While mitigating capital outflows triggered by the U.S. monetary policy shift was likely considered, the main factor was easing financial imbalances caused by asset market overheating. Concerns about a recurrence of taper tantrum are also raised as tapering progresses. However, from a macro perspective, South Korea's external sector stability is somewhat secured.

▲Shin: Global investors' risk aversion may strengthen. This means that asset prices, such as stocks and real estate, which were previously considered overvalued, may be adjusted. Another channel is the potential credit supply slowdown by global major investment banks (IBs) and banks. This could worsen funding conditions in international financial markets. Such changes will similarly affect South Korea's capital markets.

▲Lee: South Korea inevitably has to raise interest rates following the U.S. base rate hikes. This raises concerns about negative impacts on the domestic economy. So far, monetary authorities have raised base rates to address instability in the real estate market, but this approach, which used monetary policy to address issues that should be resolved by improving real estate market regulations, is not considered an appropriate response.

-Global supply chain issues are cited as one of the biggest external risks this year. What government measures are necessary to maintain and strengthen South Korea's export trade improvement? How do you assess current responses?

▲Kwon: Our companies are actively joining advanced countries' supply chain construction efforts, so government-level support is needed to secure favorable incentives during their entry process. Amid U.S.-China hegemonic competition, South Korea must maintain a balanced strategic response considering its high dependence on both countries. Especially, China remains South Korea's top trading partner, and many domestic companies still have facilities in China. Authorities must strive to prevent these companies from suffering damage.

▲Kim: More than ever, communication and cooperation between government and companies are necessary. While pursuing supply chain diversification strategies to reduce dependence on specific countries, support measures should be prepared to substitute core materials, parts, and equipment with domestic supply as much as possible, simplifying global supply chains. Minimizing supply chain risks will be a fundamental principle in configuring optimal networks by industry. Also, South Korea's manufacturing capabilities should be fully leveraged during global supply chain restructuring, managing to prevent leakage of core technologies and personnel, while inducing and supporting more aggressive investments in new technology fields.

▲Shin: It is expected that distortions in global supply chains will somewhat ease around mid-year as vaccination rates rise in countries with low vaccine coverage.

▲Lee: Bottlenecks create price pressures from the supply side, causing inflation. This results in similar difficulties for companies and households in terms of rising costs and living expenses. Once the real economy disruptions caused by COVID-19 are resolved, supply chain bottlenecks are expected to ease, albeit with some time lag.

Do not get bogged down in political issues over CPTPP accession

-The current government plans to apply for membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in April, but membership remains uncertain. What approach and pace are advisable for pursuing accession?

▲Kwon: This year, strong U.S. economic growth and U.S.-centered global supply chain restructuring are expected, so South Korea, with an intermediate goods export ratio of 70%, urgently needs a swift response to the new economic order. While strengthening the Korea-U.S. alliance, policy authorities must actively engage in diplomacy to prevent domestic companies' investment and production facilities in China?the top trading partner?from suffering due to political issues. Regarding CPTPP, with China and Taiwan's proactive membership applications, South Korea also needs to accelerate its efforts.

▲Shin: After experiencing supply chain disruptions post-pandemic, and with expected future U.S.-China conflicts, strengthening of domestic-centered global value chains is anticipated. This will sustain high uncertainty in world trade. Joining CPTPP could help reduce export concentration to certain countries like China and promote export growth through market expansion. This is expected to have a positive impact on the domestic stock market, especially centered on manufacturing with high export ratios.

▲Kim: From the mid-2010s, bilateral issues emerged, and the current government inherited the worst Korea-Japan relations, compounded by Japan's semiconductor material export restrictions in July 2019, making the situation very unfavorable. Hastening accession negotiations at that time might have risked very disadvantageous negotiations. Considering the overall situation, it cannot be said that the government missed the opportunity.

-The government is pushing for carbon emission 'net zero' achievement. There are opinions that incentives should be given to promoting companies and voices about related disclosure systems and the role of capital markets. What advice do you have?

▲Kwon: Most companies subject to greenhouse gas management are concerned about worsening management due to the 2030 enhanced reduction targets. Major advanced countries have up to 60 years to achieve carbon neutrality, but South Korea has only 32 years. A gradual and orderly energy transition should be pursued by appropriately utilizing existing energy sources, including nuclear power.

▲Shin: Capital markets should become venues where information on companies' net-zero transition status is efficiently produced and exchanged. To this end, establishing disclosure standards and developing performance and risk indicators to set concrete directions are prerequisites.

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