Choongsoo Kim: Emerging Asia and global economic recovery
Speech by Mr Choongsoo Kim, Governor of the Bank of Korea, to the Asia Society, New
York, 18 April 2012.
* * *
Introduction
Ms. and Mr. presidents,
Distinguished members of the Asia Society
Ladies and gentlemen,
I am very pleased to have this opportunity to talk today before distinguished guests and
economic leaders from New York and people from all walks of life with a deep interest in the
Korean economy.
I would also like to express my sincere appreciation to Asia Society's Co-Chairs, Henrietta H.
Fore and Ronnie C. Chan, and all of those involved for arranging this wonderful occasion
today.
Founded in 1956, the Asia Society has worked as a mediator promoting exchanges
and cooperation between the U.S. and Asian countries and greatly contributed to the
remarkable economic development they have achieved today.
I would like to praise most highly the impressive achievements of Asia Society not just in the
economic sector but across the entire spectrum of culture, arts and policy. I expect Asia
Society to play a greater role as an opinion leader for further development in Asia.
Today, I will first give a brief introduction to the role of Asian emerging market economies
that have become the center of the world economy and then go on to talk about the
prospects and tasks now facing the Korean economy, which has been assessed to have
pulled out of the global financial crisis very quickly.
Body
During the course of overcoming the global financial crisis, the international community has
concentrated its financial resources particularly on resolving the euro area sovereign debt
problems.
Thanks to this effort, the international financial markets have been stabilized to a certain extent
while the real sector economies remain still sluggish.
Q2 Q3 Q4 Q2 Q3 Q4 Q1
Q1 Q1
5.5 3.7 4.7 3.7 3.2 3.3 3.1 2.6
World 5.8
4.2 2.1 1.6 1.3 0.8 1.9 1.2 0.6
AEs 4.0
Source: Bloomberg Source: IMF
Given that the weakness of the real economy is at the base of all financial crises, maintaining
growth in the real sector is more important than securing financial stability through
short-sighted methods.
Although financial regulatory reforms, such as Basel III, are underway as part of the efforts to
overcome the crisis and prevent another, the highest priority is placed on leading world economic
growth.
In this respect, global financial markets are supposed to leave the ICU(Intensive Care Unit), and
time is ripe to initiate a new strategy for further growth by attaining a global equilibrium.
Asian emerging market economies(EMEs) have shown rapid growth, boosted by an
export-oriented growth strategy, cheap high-quality labor, and the introduction of capital and
technology from advanced countries, and so on.
Unlike advanced economies(AEs), Asian EMEs, in particular, have been growing steadily
since the global financial crisis.
GDP Growth
(%)
Korea China India US Euro
- 3.5 - 4.3
9.2 6.8
2009 0.3
10.4 9.9 3.0 1.9
2010 6.3
9.2 7.4 1.8 1.6
2011 3.6
Source : IMF Source: IMF, BOK
The Asian economy has been leading global economic growth since the 1980s and its
importance is expected to grow even further.
Although having been temporarily sluggish due to the currency crisis in late 1990s, the GDP,
trade volume and foreign reserves of the economy in this region have all been on a steady
rise.
( )
Trade Volume China(2) Japan(4) Korea(9)
(world rank, 2010) Hong Kong(10) Singapore(13)
Official Foreign Reserves
China(1) Japan(2) Taiwan(4)
Korea(7) India(8)
(world rank, 2011)
Especially, the rate of contribution of Asian EMEs to world GDP rose from 14% in 1970s to
23% in 1980s, 34% in 1990s and 50% during the period for 2000~2011. The IMF forecasts
the rate to remain at around 50% for the coming five years.
However, regarding macro-financial linkages, the international community has so far
stressed securing financial stability, focusing more on the effect of finance on the
macro-economy than on that of the macro-economy on finance.
As a result, the injection of global financial resources concentrated poured mainly into
Greece and other heavily indebted countries in the euro area, and a relatively smaller
proportion of these resources was allocated for growth promotion and job creation.
In this respect, a true normalization of the current sovereign debt crises in the euro area can
take place when individual European countries secure fiscal consolidation through a recovery
of their respective growth trends.
Bailout of Heavily Indebted Countries
(billion euro)
Greece
Ireland Portugal
1st round 2nd round1)
EU 80 145 45 52
IMF 30 28 23 26
Total 110 173 68 78
Note: 1) Including those not carried out in the first found
Source: EU Commissions
At another point, a global financial crisis originating in the US and the euro area and the
consequent policy responses in advanced countries have negative spillover effects on EMEs
through the financial and real channels.
The export momentum of EMEs weakened at the time of the financial crisis due to sluggish
import demand in major countries amid the economic slowdown.
In addition, as uncertainty over economic conditions mounted due to the global financial
market unrest, the sentiment of economic agents turned sour and, consequently,
consumption and investment also weakened.
Note: 1) Period-on-period annualized rate Note: 1) Standard deviation of daily volatility of stock price
indices of 50 major enterprises in EMEs
Source: IMF
Source: Bloomberg
In addition, as the burgeoning global liquidity created by the monetary easing of the central
banks in major countries, exchange rate volatility in emerging market countries increased
and international commodity prices such as those of oil rose sharply.
Government Bond Yield Oil Price
2009 $1,725 Purchase of agency
(QE1)
~2010.3 billion securities, MBS, etc.
FRB
2010.11 $600 Purchase of long term
(QE2)
~2011.6 billion treasury securities
489.2
€
2011.12 Providing LTRO1)
billion
ECB
2012.2 529.5 Providing LTRO1)
€
Note: Long-term Refinancing Operation Source: Bloomberg
The role of the Asian economy is important for the recovery and sustainable growth of the
world economy in the future and global financial resources, in this respect, should flow into
EMEs with relatively high productivity and a heavy demand for capital.
EMEs have been less affected by the crisis than advanced countries and are relatively sound
fiscally. Therefore, they have sufficient latitude in macroeconomic policy to promote growth in the
short-term.
In addition, although Asian EMEs achieved high growth thanks to export-oriented strategies,
intraregional trade continued its upward trend even after the financial crisis as countries
turned to stable growth policies through domestic demand expansion.
U.S. EU China Korea
2008 76.1 69.8 17.0 30.1
2009 89.9 79.4 17.7 33.8
2010 98.5 85.3 33.5 33.4
I Source: IMF I Source: IMF
Meanwhile, since urbanization and industrialization are proceeding apace in Asian EMEs
such as China and India, there is a high demand for capital to build up infrastructures. What
is more the growth rates of labor productivity are higher in them than in the advanced
countries.*
The labor productivity growth rates in countries such as Korea (3.1%), India (4.1%)
and China (9.4%) during 2000~08 greatly exceeded the average for OECD countries
(1.6%).
Development Plans Labor Productivity1
China1) India2)
Set-up of
City and western
infraStructure
development
Investing 200 billion
Set-up of roads, houses,
dollars per year
etc
Expanding openness
Promoting new
automobiles, drug,
industries
distribution, etc
next-generation
strategic industries such
as IT, BT, etc
Notes: 1) for 2011~15 2) for 2012~16 Note: 1) Annual average growth rate during 2000~08,
on a basis of all industries
Sources: APO, OECD
For its part, the Korean economy has developed thanks to export-driven growth just like
other emerging Asian nations, and along the way it overcame crises through bold reforms.
Especially, Korea's trade volume had been over 1 trillion dollars in 2011, only nine countries have
reached this trade volume.
Notably, Korea has won a reputation for having surmounted both the Asian currency crisis
in the late 1990s and the recent global financial crisis faster than other countries around the
world without retreating in liberalization; for example by introducing protectionist measures.
During the Asian currency crisis, Korea carried out a strong restructuring of companies and
financial businesses in a drive to improve the economy's structural weaknesses. Also, Korea
overcame the global financial crisis thanks largely to bold initiatives by the government and
the central bank, such as the expansion of fiscal spending and swift policy rate cuts.
So far, the remarkable development of the Korean economy has been attributable mainly to
increases in external trade, and in this sense the Korea-US FTA, which came into effect
recently, is expected to provide economic benefits to both nations.
The effects of an FTA vary depending upon the counterparts' economic conditions and their
trade structures. But for Korea, a number of FTAs have served to spur on the growth of
trade.
(The Korea-EU FTA took effect in July 2011) Even though our overall exports to the EU have
declined owing to the sovereign debt crisis, since the conclusion of the Korea-EU FTA, the
exports of those items that benefit from the FTA have maintained high rates of growth.
H1.2011 H2 Degree of Tariff Reduction
► Increases in Exports with EU
Total Exports [100] 16.7 -7.9
Gradual elimination of 10% over
Automobiles [10.4] 51.3 87.5
3~5 years
Petroleum Products [5.3] 92.8 26.0 Immediate elimination of 3~7%
Notes: YoY %, [ ] represent the share of items in exports with the EU in 2011
The Korea-US FTA is believed to help maintain Korea's export momentum with the US
through tariff reductions.
In addition, the FTA is likely to boost brand recognition of Korean products that rank much
lower in terms of technology and quality.
From a medium- and long term perspective, the FTA is expected to heighten the
competitiveness of relatively weak service industries in Korea including the financial, legal,
accounting and consulting sectors.
Average tariff Increases in
rates exports to the
in the US US1)
Total exports
- 12.9
Automobiles
2.5 7.2
Electronics 2.2 1.6
Textile
13.0 1.1
Machinery 1.7 0.6
Chemicals
3.2 0.5
Note : 1) Annual average for 15 years after the FTA Note : 1) Survey of US buyers
takes effect
Source : KITA
Source: KIEP
For the US, the FTA with Korea, the largest after NAFTA, is likely to help the US economy,
which is already showing signs of improvement.
The volume of US trade has increased sharply since it concluded the NAFTA with Canada
and Mexico in 1994.
Trade scale to Canada & Mexico 1988~1993 1995~2000
(annual average amount, billion USD) 295 587
(annual average increase rate, %) 7.9 11.2
First of all, with greater accessibility to the Korean market, there are increasing opportunities
for industries with a comparative advantage, such as the service industry.
In terms of production, the US will be able to secure a new supply line as it becomes
possible to purchase high-quality Korean parts and components.
Moreover, the US and the European companies can use Korea as a base for advancing into
other East Asian countries as Korea trades on a large scale with China*, which has emerged
as one of the G2 in the global economy.
In terms of trade scale in 2011, China is Korea's largest trading partner, and Korea is
China's third largest trading partner, following the US, and Japan.
In the long term, I hope the Korea-US FTA will bring positive effects on growth and
employment in both countries through the expansion of exports and FDI and heightened
industrial competitiveness.
In addition, consumers are expected to benefit from a wider range of choice, and our bilateral
relations are likely to be strengthened still further from a political perspective including the security
dimension.
In the short term, however, difficulties are expected for the industries having a comparative
disadvantage in both nations and therefore every effort should be made to encourage the
upgrading of their structure while showing consideration for the industrial fields concerned.
The Korean economy is expected to continue its solid growth, but as the growth rate is
anticipated to slow down over the medium to long term, it is vital to be prepared for this
situation.
Even in the face of heightened economic uncertainty at home and abroad, the Korean
economy is forecast to grow at around 3 1/2% this year, led by domestic demand including
facilities investment.
Export momentum is expected to approach the pre-crisis level in the second half in line with
global economic growth.
Korea's Economic Outlook Exports Momentum
Source: Bank of Korea
Source: Bank of Korea
However, downside risks are expected to remain high for some time affected by external risk
factors including the inflationary pressure from oil prices and possibility of euro area
sovereign debt problem spreading.
Prospects for Economic Growth
(YoY, %)
2011 2012e)
H1 H2 year H1 H2 year
3.8 3.4 3.6 3.0 3.9 3.5
Private consumption 2.9 1.6 2.3 1.8 3.8 2.8
Construction investment -7.1 -3.0 -5.0 2.1 3.4 2.8
Facilities investment 8.9 -1.1 3.7 5.0 7.3 6.2
Goods exports 14.5 6.9 10.5 3.8 5.8 4.8
Source: Bank of Korea
In the medium- to long-term, the growth rate is projected to decline due to a falling birth rate
and ageing population.
Total fertility rate(persons) : 3.6 in 1970s 1.9 in 1980s 1.6 in 1990s 1.2 from
→ → →
2000 to 2011
Total & Working Age Population Population by Age Groups
Source: National Statistical Office Source: National Statistical Office
To boost the future growth potential, the key is making the transition from input-led growth to
productivity-led growth.
As the increase in the productive population will be limited due to the low birth rate, it is more
effective to make efforts to increase the quality of human resources and to use the given
labor resources more efficiently.
More specifically, it is necessary to induce improvements in productivity as the driver of
growth by enhancing that in the relatively laggard service industry and by increasing input
quality through investment in R&D and innovative technologies.
Concluding Remarks
Distinguished members of the Asia Society
Ladies and gentlemen,
As I pointed out earlier, the Asian emerging market economies are leading world economic
growth and they are sure to become the axis of the world economy.
It is worth noting the attention Korea has been drawing from the international community for
the way in which it overcame the Asian currency crisis and the global financial crisis and the
country is expected to contribute to global economic growth in the coming years as well.
However, we cannot say that such rapid growth will last in Korea and other Asian EMEs,
simply because they are currently exhibiting a remarkable economic performance.
Since the Asian growth model is accompanied by several constraints such as the heavy
reliance on overseas demand and production factors, the derivative use of advanced
technology and a low degree of financial market development, it is important to recognize
these shortcomings and strive to improve them.
For instance, due to their heavy external dependence, Asian EMEs were greatly affected by
the recent financial crisis, even though it originated in the advanced Western economies
such as the U.S. and European countries. Hence, we need to seek growth based on the
quickening of domestic demand.
In addition, on the production side, we need to make efforts to expand growth potential
through the improvement of productivity in the services sector, the shared growth between
large and small corporations, and the development of new growth industries.
Although the global financial crisis started in New York and then engulfed the euro area, it is
important to prevent the contagion from the crisis from spreading to Asia if we are to have a
recovery of the world economy and balanced development.
To accomplish this goal,
Firstly, we need strengthen policy coordination among individual countries in the absence of
an organization with global jurisdiction that could manage global liquidity.
Secondly, we should seek long-term and stable world economic growth through achievement
of a global equilibrium by invigorating global gatherings such as G20 meetings, rather than
making local equilibrium efforts to solve problems in individual regions.
Lastly, we need to develop policy instruments and reform the financial system in global terms
so that the world's financial resources can flow into sectors with high productivity including
the building-up of social infrastructure in Asian EMEs.
Ms. and Mr. presidents,
Distinguished members of the Asia Society
Ladies and gentlemen,
I would like to express my deep gratitude to all members of the audience here today for their
close attention to the Asian economy as a whole and that of Korea in particular.
Drawing my remarks to a close, I hope that as true friends of Korea you will not hesitate to
give your suggestions and advice about the future of the Korean economy.
Thank you again for listening so attentively.