No, South Korea Doesn’t Need Another IMF Rescue

(Bloomberg Opinion) -- South Korea doesn't need another rescue from the International Monetary Fund, but it is stuck and does need a new model.

News hasn't been great lately for the nation, sandwiched between slower growth in China and Japan. Gross domestic product shrank last quarter in what was probably a shock, not just to economists who anticipated a small increase, but to policy makers: Just a week earlier, the Bank of Korea had pushed back against the notion of an interest-rate cut and said expansion this year would be a respectable 2.5 percent. The central bank looks out of touch; monthly statements resemble carbon copies of the prior month, more so than many of its peers in consequential economies.

The dim outlook in South Korea is a reminder of what is, and isn't, firing in today's global economy. Much of the macro narrative in the past few weeks has focused on signs of stability in China, which is good, and some surprising resilience in the U.S. – even better. But the shoring up of the two most important economies between January and March hasn't done much for global trade: Volumes fell in the first two months. Exports account for half of South Korea's GDP, and technology products have been a particular soft spot.

The prospects of a soft landing for the global economy remain broadly intact, but there are some big gaps. Korea is emblematic of these. As I wrote in March, exports have gone from being one of Asia's defining positive characteristics to a drag. The other reliable boon for countries in the region was proximity to China. But that was when Asia's largest economy was clocking double-digit growth, or close to it. Take away export supremacy and the idea that China solves all ills, and you don't have much left.

So serious is South Korea's funk, it needs an overhaul akin to the one that followed the 1990s Asian financial crisis, says Yung Chung, managing director of AlixPartners LLP in Seoul. “Korea needs to go through restructuring 2.0 – 1.0 was IMF,” Chung was reported as saying by my Bloomberg News colleagues Ken McCallum and Kyungji Cho on Thursday.

Leaving aside the idea that restructuring consulting firms tend to advocate for restructuring, Chung may be on to something. The place could use a jolt, though I recoil a bit from the financial crisis analogy. The IMF's 1997 bailout forced South Korea into painful changes that drove up unemployment and sparked mass protests.

Seoul is caught in a global industrial shift rather than a balance-of-payments crisis or a banking implosion like the crisis of two decades ago, an era that was deeply traumatic across Asia.

A revolution in domestic commerce within South Korea, as advocated by Chung, might help position the country to benefit from the next global upswing. In the short term, root-and-branch surgery is likely to be disruptive.

There's scope for fiscal policy to revive growth and possibly avoid a recession – generally defined as two consecutive quarters of GDP contraction – while the Bank of Korea tries to get its act together. The BOK may be hanging on for fear of conveying November's lone rate increase was an error. That's a natural instinct, but circumstances require action. 

The government recently announced a supplementary spending package that might buttress growth. Seoul should be bolder. For years, we have been hearing that monetary policy alone can't bear the burden of sustaining expansions around the world.

That's one piece of advice Korea could adopt in the short term that might have a prayer.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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