Choongsoo Kim: The past year in retrospect, challenges and resolutions
for 2013
New Year Speech by Dr Choongsoo Kim, Governor of the Bank of Korea, at the Bank of
Korea, Seoul, 2 January 2013.
* * *
Dear fellow members of the Bank of Korea,
The Dragon Year of 2012 has passed and 2013, the Year of the Snake, is now upon
us. As the New Year begins, I take it as very meaningful that we all gather to reflect
together on the past year and firm up our resolve to undertake what we must in the
coming year. It is already almost five years since the Global Financial Crisis struck, yet
the fact of the matter is that we still have little clue as to how it may be fully
resolved. Instead, we may have ourselves become so accustomed to the crisis situation
as to even arouse suspicions that we might be becoming gradually desensitized to its
seriousness. The current financial crisis is analyzed as originally caused by the side effects
of the deepening of global trends, and during the past few years of overcoming the crisis
these trends have progressed in ways that have locked in the interconnectedness of all
economies of this world even more firmly. We have come to face the irony that our efforts to
overcome the various side effects from the rapid progress of global trends have in the end
produced an even stronger process of globalization. What this means is that, due to the
environment of continuing economic recession the growth of international trade has
contracted compared to the past, but the universality of policies and systems has
expanded all the more and their interlinkages have been further strengthened. In such
an environment, the extent to which a single nation can resolve problems through its
own policy tools alone can be said to be growing more and more limited. On the
other hand, as the crisis drags on economic agents' patience for enduring the social
tensions aroused by the reform agendas that had been pursued in several countries
around the world is also showing signs of reaching its limits, and in many countries
there even appear to be preoccupations with the short-term resolution of outcomes
brought about in the course of handling the crisis, rather than concentration on
identifying the nature of the crisis or preventing its reoccurrence.
Corresponding with the changes in global economic conditions, each country has
attempted various countermeasures domestically, but their effects in bringing about
economic stability and growth while eliminating the uncertainties prevalent in the global
economy are considered to have not been sufficient. It goes without saying that it has
not seemed possible for Korea, whose growth driver is trade, to be immune to the
effects of these global uncertainties. In Korea, in addition to the inevitability of a
slowdown of growth, to prepare against the possibility growing of economic instability
developing into social risk as uncertainties rise higher, a high priority has been given to
risk management policies, so that the household debt problem, the long-term slump in
the housing market and the like do not pose economic risks, while considerable policy
attention has also been devoted to restraining the aftereffects of the quantitative
easing policies in advanced economies.
The economic outlook for this year does not foresee either the global or the Korean
economies being markedly better than last year, but at the same time neither can it
be said to contain a large number of negative opinions. Since an economy is akin to
a living organism, apt to show dynamic movements at any time, it is important that
there be flexibility to deal with various scenarios that might occur. The Bank of Korea
has already made it public that, while firmly anchoring the basis for price stability, its
monetary policy this year will seek to promote financial stability, support the recovery
of economic growth, and strengthen support to vulnerable sectors. As for the inflation
target, the Bank had for the past three years set it at a range of 2 to 4%, around a
3% midpoint, but for the next three years this has been narrowed compared to the
past to a 2.5-3.5% range. Given that uncertainties in the external environment likely to
threaten price stability will remain high, this narrowing of the inflation target range
should be recognized as reflecting the Bank of Korea's firm determination for price
stability.
Dear members of the Bank of Korea,
The past year in retrospect: continued prevalence of uncertainty
The past year can be referred to as one that ushered in political changes worldwide in the
midst of a global financial crisis. Political leaders were newly chosen in all four of the
countries surrounding Korea, and there were changes in political leadership in many other
countries as well, including France. In Korea, too, a new president was elected, and a new
government is to be inaugurated soon. From a global perspective, it was imperative last year
that the euro area crisis be resolved, but I would call the state of affairs one in which global
efforts to escape this financial crisis in a time of rapid political change could not deliver the
results originally expected. The immediate challenges that the world must work on can be
classified broadly and summed up as, first, global rebalancing and, second, reforming the
shortcomings of the financial regulatory and supervisory system that triggered the financial
crisis. The former, as I have emphasized several times, is illustrative of the point that at the
bottom of any financial crisis always sit imbalances in the real economy that have nurtured it,
and the latter is based on the judgment that the cause of the financial crisis this time around
lay in the failure to manage systemic risks, by reason of which reform efforts as represented
for instance by Basel III and the Dodd-Frank Act are being undertaken to strengthen the
financial regulatory and supervisory framework.
The financial crisis that broke out in New York crossed over to Europe, where it
metastasized into a fiscal crisis, and the situation now is one in which real economies
around the world cannot properly pull out of recession, as growth in some emerging
market countries has declined. Currently, individual countries are drawing up measures
to cope with the effects of the U.S. fiscal cliff problem, but
our worry lies in the fact
that, even if in actuality that issue is appropriately resolved in one form or another, we
will not see the Global Financial Crisis come to an end any time soon. Last year,
various of the initiatives attempted in the US, Europe and elsewhere in response to
the financial crisis involved the introduction of unconventional policies or facilities that
had not been tried in the past. It is bound to take time for newly attempted endeavors
to take effect,
but with the addition on top of this of political uncertainties resulting
from the elections of political leaders in these countries economic activities could not
be carried out in a stable manner, and I would say that in consequence economic
recovery could not be anything other than slow.
Even under such external circumstances, we can say that economic management in
Korea was stable last year, to the extent that ours was the only country whose
sovereign rating was upgraded by the world's top three credit rating agencies. Although
growth slowed and domestic demand was sluggish, a very large current account
surplus was recorded on the strength of favorable exports, and prices stabilized. As
the supply-side inflationary pressures, including those from energy prices, were
relatively eased, and the output gap was negative due to the economic recession, the
Bank of Korea was able to keep prices stable at the 2.2% level, well below the
3% midpoint of its inflation target. This was a dramatic change, I would say, compared
with the 4.0% of 2011. For the Bank as well, as it operated through the first year
after its mandate for financial stability was introduced in the Bank of Korea Act, there
was a big change in that it came to regularly submit its Financial Stability Report as a
statutory report to the National Assembly. The Bank could not avoid difficulties in the
process of conducting its monetary policy, however. And needless to say this was
because, with external uncertainties rising economically and politically, it was not easy
to grasp the impacts on the Korean economy of the various unconventional polices
introduced in the US and Europe. In circumstances in which globalization is
intensifying, it is clear that decision-making without careful consideration of the impact
on the domestic economy of changes in the external environment is inappropriate, but I
must honestly confess that our knowledge and experience were inadequate for
understanding these changes, and persuading economic agents of this situation was an
even more difficult responsibility to fulfill. Along with this, the Bank also exerted efforts
to keep abreast of the new global trend in national economic management, in which
the jurisdiction of the central bank cannot but be expanded. It is out of this standpoint
that the Bank has considered financial inclusion in the course of carrying out its
monetary policy, and has striven to
take the first step toward internationalization of the
won by partial use of the proceeds of its currency swap arrangement with the People's
Bank of China for trade settlement. Meanwhile, it is profoundly encouraging that Bank
of Korea staff members' activities outside the Bank have grown vigorous, that their
perspectives in viewing economic issues have become global, and that their research
and analysis capabilities are being greatly fostered.
Dear friends and colleagues at the Bank of Korea,
Advent of new challenges for central banks: redefining their status and role
The changes that have unfolded over the past five years since the Global Financial
Crisis can be seen as a revolutionary shift in the perception of the central bank
functions held for the past century. On the one hand, in several advanced economies
whose sovereign debt levels are high and their fiscal spaces exhausted, it has
become inevitable that monetary policy play an active role in management of the
economy; and on the other, although to block outbreaks of financial crisis it is
desirable to strengthen financial industry resilience through tight capital- and
liquidity-related regulations, the fact of the matter is that concerns are being raised for
realistic reasons about such regulations weakening competitiveness in the short run,
and causing economic recovery to slow even more thereby. Let me elaborate on the
former point. As accommodative monetary policy stances have been kept in place
central banks' nominal policy rates have reached the near zero level, and unorthodox
measures dubbed quantitative easing (QE) are thus being attempted in many different
forms. For monetary policy to have an effect in a situation of realistic constraint at the
zero lower bound, communication policies such as forward guidance are being
attempted, seeking to nudge the activities of economic agents in appropriate directions.
While Korea's policy rate was 5.25% just prior to the financial crisis, that of the
US stood at 5.25% in early 2007, and the dynamic changes in the economy that saw
it fall to its current 0-0.25% level within only two to three years offer us many lessons.
And to expand on the latter point, let me note as a case in point that the reason
why the US and Europe cannot move readily toward the Basel III framework as
originally planned, as you are well aware, is due precisely to concerns about a decline
in the productivity of finance. In particular, in order for a certain regulation to have its
intended effect in the global economy the possibility of regulatory arbitrage must be
blocked, but the reality is that many countries are facing a dilemma since, in order to
achieve this goal, uniform regulations should be applied to countries around the world
at different levels of financial development.
In the past century, as overcoming the evils of inflation has been made the number
one priority of central banks, a large number of them have included price stability in
their
articles of purpose and have carried out inflation targeting. This has generally
been an effective policy in economies with high inflationary biases, and Korea has
also adopted it. It has recently been suggested in academia, however, that the level of
nominal GDP should be made the policy goal instead, and one major central bank
has gone so far as to leave open the possibility of its carrying out policy along these
lines. This has of course long been proposed in theory, and although it cannot be
seen as having yet been tested as an effective alternative, the problem that causes it
to be advocated lies in the fact that our existing instruments are not proving effective.
As I am sure you are well aware, in economies that have been unable to escape low
growth and deflation for extended periods there have recently even been attempts to
inflate artificially to overcome this situation. It is not yet known what consequences
might result from these attempts, but they too are based on the judgement that the
existing policies have failed to deliver their intended effects.
Communication policies related to the central bank policy decision-making process are very
crucial even to central banks with scope remaining for policy rate adjustments, and I believe
they have brought about changes in our ways of thinking even in the discussions concerning
the transparency of the central bank's policy decision-making process. Transparency is
regarded as having the advantage of reducing uncertainty, and it can be said to be proxied
by precision and conditionality. The US Federal Reserve has recently come out with
communication policies hardly conceivable in the past. It has named the unemployment rate,
the rate of inflation, and long-term inflation expectations as its three major parameters, and
with regard to their levels has explicitly spelled out the two qualifications I just mentioned.
This represents a great transformation for central banks. And of course uncertainty does still
remain, for instance as to the degrees of deviation to be tolerated should the three variables
move in different directions against expectations, and as to what data will be used as
reference for information related to the future rather than the past. Although there is no
absence of voices tinged with concern about unintended consequences, i.e. the
consequence of efforts to enhance transparency having instead further increased the scale
of uncertainty or its scope of fluctuation, there is no doubt that we have taken the first step
toward a sea change. The reason why such discussions are drawing particular attention is
because, if advanced economies show stirrings of recovery, then central banks will have to
cope with the possibility of global inflation as feared in some quarters. In addition, changes in
the monetary policy stance to absorb the liquidity unleashed through QE could also act as a
shock to the international capital markets. Therefore, for central banks that cannot be free
from the influence of global inflation and changes in the international financial markets, it is
important to understand the preconditions for any changes in advanced country monetary
policy stances, and efforts must be devoted ex ante to preventing any side effects that could
arise in the course of such changes going forward. This is because, if we cannot properly
deal with a global shift in the monetary policy stance, the possibility cannot be ruled out of
our facing a local crisis. Such attention is in fact related to the policy tasks I mentioned earlier
as goals that should be taken up by central banks. There is still a lack of evidence to make
the assessment that nominal GDP targeting is more appropriate than inflation targeting, but
one thing that is certain is that it is probable that operating the central bank with a reliance on
any one yardstick will be judged as perhaps not desirable.
My dear fellow members of the Bank of Korea,
Resolution for 2013: extending ourselves as a global BOK to be a more competent central
bank
Even though faced with countless challenges domestically, we must not be negligent in
responding appropriately to changes in the external environment. As I explained at
some length earlier, the various new policies attempted in several nations will
inevitably bring about big changes in the existing order. The Korean economy, whose
degree of external dependence is high, falls under the direct sway of their influence. I
would say that this is awakening us to the need to always
stay on the alert and not
bury ourselves in the past when the world outside is changing. I believe that our
biggest challenge is how much we can contribute to directing these rapid changes in
the global economy. Regarding changes in the global economy, and even our own
central bank functions, we have had a tendency to rely on theory and experience from
the West. Concerning the expression "international perspective" as well, the reality is
that the definition we have of it is very passive, amounting to having the ability to
identify changes in the international economic community and understand what effects
they have on the Korean economy. Going a step beyond this, the notion of an
international perspective that we must carry with us from this point on includes having
knowledge and viewpoints on how the international community should change. Without
this shift in perception, we cannot say that we truly possess the ability to make
decisions independently. What I am saying is that it is very urgent that we cultivate
our capabilities and build up our capacity now for internalization of issues in the global
economy. Monetary policy is no panacea, but there is no denying that its content is
changing very rapidly.
Simply put, I believe there is no proposition of greater priority to us than that of
making a more competent central bank. Propositions carved in stone can rarely exist,
but I deem this to be our calling in this era. The aim of becoming a "Global BOK",
standing shoulder to shoulder with leading central banks around the world, is based
on this proposition, which is also a precondition for our being able to make decisions
independently. Being competent means staying ahead of others and being differentiated
from them, and this implies that at times we must not decline to take a lonely road in
solitude. Given our inherent nature as a sole organization in the nation, it is only
when we imbue this sense of tension, intentionally even, that the vitality of our
organization can be maintained.
At the start of this new Year of the Snake, let us all pull together and pledge to
ourselves and to others beyond these walls to once again profoundly transform the
Bank of Korea. I would like to suggest the following seven points, as attitudes and
thoughts that I hope we will hold in our minds throughout this year:
First, the Bank of Korea must not become a place where time has stopped. Time
must flow, and the Bank must be an organization of people concerned about the
issues of tomorrow. Are we not still pouring our energies into the identification of past
crises? What forms will forthcoming ones take? What must we prepare for? In
particular, we must not be trapped by the dogmas of yesteryear. Dogmas present
other people's philosophies and experiences, and may even already be obsolete.
Second, we must depart from a domestic-oriented perspective. In an environment in
which we live in an open economy, we need to strike a balance between the
domestic and the global perspectives. We must exert efforts to understand the
pressures on us coming from the external environment, and seek measures to resolve
global issues. We must not just look at our peers beside us, but be equipped with
the discernment and wisdom to observe our rivals overseas. We must at all times
bear in mind our competition and cooperation with international organizations and other
central banks.
Third, we must not be content with a reality of mainly undertaking familiar tasks.
Rather than just repeating what we did yesterday, we must seek out new tasks. We
must evaluate ourselves to see whether while claiming in words to "renew ourselves
each day and the next", we have not in reality been rather more faithfully carrying out
our routine work. I believe we cannot expect to obtain different results and to grow
while only repeating the same work. The process of overcoming the Global Financial
Crisis requires the courage to explore the unknown. As central banks have played
pivotal roles in overcoming global economic crises, and are around the world
becoming perhaps more scholarly organizations than even academia itself, so we too
must from now on be able to propose evidence-based policies, and not those based
on unrealistic arguments.
Fourth, we must not continue to take a passive attitude of obediently undertaking only
our assigned tasks. We must have an enterprising spirit to voluntarily seek new tasks.
The most you can do in carrying out assignments given by others is to get the
answers right, however much you may know. This is because there is no involvement
of the critical mind and so from here on, we must develop the insight to frame and
present issues ourselves. In the social sciences, right answers may not even exist.
However, provided that we have a properly working critical mind, I believe we may
have the merit of at least heading in the right direction.
Fifth, working internally in isolation must not be our practice. In this global economic
environment we must also develop a multi-tasking capacity, to carry out a variety of
tasks comprehensively. Positive results must flow from our enhancement of autonomy
in line with the abolishing of job groups to this end. We must foster a spirit of mutual
collaboration and cooperation with our colleagues and junior and senior staff members.
The Bank must become an organization in which diversity coexists. By devoting efforts
to mutual cooperation and coordination between the human resource and management
departments, between the departments doing research on and analyzing the markets,
policy and institutions, among our regional branches and among our overseas offices,
we must go about accomplishing our goal of maximizing the synergies therefrom.
Sixth, we must not define the Bank of Korea's operations very narrowly, as in the
past. The central bank must be an organization that contributes to the national
economy, and it must establish close collaborative relationships with the various
institutions in society. That is to say, under no circumstances must we be isolated
from the outside world. We must operate with the awareness that information is to be
shared and communication to be smooth. Even more important, as a result of this
drive to open our doors, is that staff working in the central bank develop as key
human resources recognized as indispensible not only within the Bank of Korea but in
society as well.
Seventh, we must not forget that all of our actions are the focus of attention at home
and abroad. We must be role models for the nation in all our areas of operation. I
will reflect the results of the survey of employee opinions on the various institutional
changes pursued here over the last two years to transform the Bank of Korea into an
advanced central bank, and see to it that our positive transformation to meet the
expectations of the public can be constantly sustained. We are in the meantime
reflecting on the fact that our scores in the evaluation of anti-corruption
competitiveness and integrity conducted by a national agency last year were low, and
working to make up for our imperfections. Although the evaluation criteria used for us
differed from those applied to other comparable organizations, without making an
excuse of this we must, if we are to take pride in being a central bank, exert efforts
to not consider any matter of public business as trifling but do our utmost and become
role models for others.
None of these are easily achievable tasks, of course, but we must join forces to see
all these changes through. And under no circumstances should we ourselves
underestimate our potential. Until the Global Financial Crisis ends we must not relax
our guard, so as to avoid rigidity and be meticulous in responding flexibly to the
changes in global economic conditions. You may well remember that one year ago
today, in this place, I urged that we carry out our newly-given financial stability
mandate well, achieve the inflation target, and pursue institutional reforms that meet the
public's expectations. And I do not think it would be praising ourselves too much even
if we say that we have achieved
these three goals without difficulty. This goes to show
what we are capable of, even under anything but easy conditions at home and
abroad, and so let us keep on changing so that one year from now, when we gather
again in this same place, we can confirm the changes in ourselves.
We should bear in mind that history has always found its way to new solutions in
response to crises, and has not returned to the past. This means that a future we
have not expected is unfolding before us. If a crisis has erupted for unexpected
reasons, who knows but that the post-crisis economy may also evolve to form a new
paradigm of a state beyond our imagination.
It is very difficult to adopt a new attitude. There is an African proverb that says "If
you want to go fast, go alone. If you want to go far, go together." It is said to be
because when you are going far you cannot avoid dangerous animals. In the face of
the greatest financial crisis of this new century, and even more for us who have
worked in a rigid organization for so long, if we are to navigate difficulties like the
ones we face today should we not be able to go "together fast" if only for a short
while? Can we not change quickly under any circumstances?
The further we venture into the future, the more the past will try to hold us back in
the same place. We may even experience the discomfort of having our efforts
evaluated by past standards. That is why it is difficult to build a new future. We must
overcome all such adversities, however, with dignified and indomitable hearts as proud
stakeholders in the central bank, and in that sense may this year go down as a
historic one.
In this new Year of the Snake, I wish the very best of fortune to all of you and
yours, and to all members of the BOK family.