S. Korea may sustain recovery without economic stimuli: U.S. expert

September 6, 2009 9:57 pm 

By Hwang Doo-hyong

WASHINGTON, Sept. 7 — South Korea may be able to sustain its strong economic recovery without further stimulus measures due to undaunted domestic consumption and brisk exports buttressed by a weak currency, a U.S. expert said Sunday.

"It is too soon for the United States, but some other countries, such as Korea, may be able to scale back their (stimulus) efforts," Barry Bosworth, senior research fellow at the Brookings Institution, said in an interview with Yonhap News Agency. "I think that Korea has no domestic damage from the crisis: it was impacted by the sharp drop in trade, which is now recovering."

Bosworth's remarks come as the South Korean government remains wary over withdrawing the fiscal and monetary policies used to prop up the world's 13th biggest economy, which over the past year struggled with the worst recession in decades.

Speaking to a gathering of finance ministers and central bankers from Group of 20 countries in London Saturday, ahead of the G20 economic summit in Pittsburgh later this month, South Korean Finance Minister Yoon Jeung-hyun stressed the need to continue the expansionary macroeconomic policy "until signs of a solid global recovery materialize."

The South Korean economy grew 2.3 percent in the second quarter from the first three months of this year, the fastest growth in over five years. The government and many experts now forecast about 1 percent contraction for all of this year — a sharp rise from the more than 4 percent contraction projected earlier this year.

The country's stock value and foreign exchange reserves have also recovered to pre-recession levels. The reserves hit a 13-month high in August of US$ 245 billion, helped by burgeoning trade surplus and the Seoul bourse's reaching the 1,600 point level, boosted by foreign investors.

Bosworth attributed the early recovery in part to the weak South Korean currency. The exchange rate has hovered at around 1,250 won against the greenback for months, following a nosedive to nearly 1,600 won late last year. Before the crisis, the currency was about 1,100 won to the dollar.

"The sharp depreciation of the won exchange rate allowed Korea to shift the burden to other countries," Bosworth said. "But not everyone can do what Korea has done. Therefore, other countries in the G-20 may push for a change in Korea's low interest rate policy so as to encourage an appreciation of the exchange rate, but I doubt that Korea will agree."

Unlike South Korea and other recovering Asian economies, Bosworth was skeptical about the path of the U.S. economy.

"For the U.S., the downturn has stopped but the strength of any recovery is highly uncertain," he said. "Domestic demand remains very weak. And premature termination of the stimulus would run the risk of further collapse."

Bosworth's comments echoed those of G20 officials, who agreed not to pursue so-called "exit strategies" to avoid a possible double dip, though some European ministers talked about the need to discuss phasing out expansionary budgets and excessively low interest rates.

Timmothy Geithner, U.S. Treasury secretary, told the gathering that "The financial system is showing signs of repair. Growth is now underway."

The Paris-based Organization for Economic Cooperation and Development recently forecast an annualized U.S. quarter-on-quarter growth of 1.6 percent and 2.4 percent each for the third and fourth quarters, up from the zero and 0.5 percent predictions made earlier this year.

The International Monetary Fund has forecast that the global economy will shrink by 1.4 percent this year, and predicted next year will witness a growth of 2.5 percent, up from an earlier projection of 1.9 percent growth.

"However, we still face significant challenges ahead," Geithner said. "Unemployment is unacceptably high. Conditions for a sustained recovery led by private demand are not yet established. The classic errors of economic policy during crises are that governments tend to act too late with insufficient force and then put the brakes on too early. We are not going to repeat those mistakes."

Bosworth lauded the G20 summit for its role "in coordinating stimulus actions and avoiding major trade protection," adding, "The next step might be some coordination of regulatory reform measures and increased international consultation among regulators."

At Saturday's gathering, the G20 officials ordered a regulatory board to come up with financial oversight measures, including a limit on bonuses to top employees of financial institutions to reduce the kind of excessive risk-taking investments that triggered the financial crisis in Wall Street.

The G20 meeting also addressed ways to reform the IMF and the World Bank to increase the quota of developing countries to reflect the growing presence of China, India and other emerging economies.

But the meeting fell short of discussing a possible replacement of the U.S. dollar as the key currency in international trade, though China and some other countries have attributed the spread of the U.S.-initiated financial crisis abroad to excessive dependence on the greenback.

Bosworth was skeptical about the idea of the special drawing rights (SDR) — an IMF unit consisting of a basket of currencies, including the U.S. dollar, euro, yen and sterling — or any other currencies replacing the greenback for the time being.

"Countries can use any currency for transactions that they wish and in a world of computers and markets to hedge exchange rate risk, it is not significant for trade," he said. "I do not see a significant benefit to the United States because seigniorage is a minor factor. Instead, countries hold reserves in dollars because they are trying to influence the dollar exchange rate of their own country's currency for trade competitiveness reasons."

The scholar, nonetheless, advised countries to hedge their bets.

"They should hold a diversified portfolio in their reserve account, but they won't do it," he said. "Since the SDR is simply a weighted average of 4 currencies, countries can achieve all the objectives of the SDR by hold the base currencies in the same proportion."

"This is a false issue in that they really want the U.S. to assist in fixing the exchange rate," he said. "That is not going to happen. China and other countries cannot fix their currencies to the dollar without some risk of capital loss. The IMF could create a mutual fund account for countries to deposit their reserves and pass the funds through investments in the 4 currencies that make up the SDR, but that would satisfy no one." (PNA/Yonhap)

LBV/ebp

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