Facing a long-term financial crisis

South Korea succeeded in containing Corona with minimal losses

  • South Korea adopted a different strategy from the western countries.

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  • Some Korean provinces have encouraged citizens to spend.

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  • South Korea has maintained a relatively low level of "Corona" infections.

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While the United States is fighting an ongoing and stubborn pandemic, and seeking a return to economic growth, it appears that South Korea has found a recipe for success if it manages to survive the spike in cases of the emerging coronavirus, late in the year.

In the latest economic forecast issued by the Organization for Economic Cooperation and Development, South Korea is looking to achieve a GDP contraction of only 1% for 2020, which is the second best performance among major economies after China.

In contrast, the eurozone is expected to contract by about 8%, and the United States could see a contraction of nearly 4% of GDP.

"The world is facing the most serious economic slowdown since World War II," said the chief economist at the Organization for Economic Cooperation and Development, Lawrence Boone, offering the latest forecast.

The Organization for Economic Cooperation and Development emphasized that economic success goes hand in hand with success in curbing the epidemic.

This is part of why South Korea has remained relatively healthy economically, starting with its highly effective management of the epidemic in the first place.

America and South Korea recorded the first case of Corona virus, on the same day.

Since then, cases in South Korea peaked at 851 new daily cases in March, before declining to less than 10. In the United States, cases never stabilized, until mid-July, as the peak was at 74,818 confirmed cases in one day.

South Korea recorded seven deaths per million people, while the United States witnessed about 600 deaths per million, according to the US Centers for Disease Control and Prevention and Johns Hopkins University.

Economic success went hand in hand with success in stemming the epidemic, in this Asian country.

Effective handling

This effective response to the outbreak led to drastic national lockdowns - the kind that paralyzed entire European economies for months in a row, and which was largely unnecessary, in South Korea - which in turn reduced economic disruption from closed factories, restaurants, etc.

"The main reason is that they were able to contain the epidemic much better than others, so the disruptions in activity were very limited," said South Korea's chief economist at the Organization for Economic Cooperation and Development, Christophe Andre.

This can be seen in Google's data, which shows that South Korea barely changed its usual measures after the outbreak, in late February, and what little affected sectors recovered quickly in April.

In contrast, hard-hit Italy saw a decrease in store visits.

Although Korea was not affected to the same extent as most other countries, it quickly launched a fairly strong fiscal response, injecting about $ 12.2 billion (0.7 percent of the country's GDP) to support businesses and citizens in early spring.

This was not a large amount, compared to what was allocated by countries such as Germany, which launched a stimulus package worth about 4% of GDP, but because Seoul provided support quickly, it helped to keep consumption high, and it continues to provide support in the form of loans and guarantees. They total $ 230 billion.

Most importantly, Seoul kept the fiscal taps open, and last week, it announced its fourth round of stimulus adding an additional $ 6.5 billion.

Korean policymakers say the increase in spending will likely continue over the next year to combat the lingering economic effects of the pandemic.

Keep up with the decline

We also find this Asian country contrasting with countries such as the United States, which started the year with significant financial and monetary support, but has since slowed down efforts to pump more money to keep up with the ongoing economic downturn.

And earlier this month, the US Congress failed to agree on a new stimulus package, after Republican lawmakers sought to trim benefits as Democrats sought more help for the massive numbers of unemployed Americans.

The Korean financial response has had a major impact, as more companies have been open to spending those cash payments, and Korean consumers are spending more and saving less.

André says: "There was a big impact on consumption. In fact, consumption rebounded, and it rose at the end of June on an annual basis, which is very amazing," explaining, "So, this stimulus was very important."

On the other hand, some Korean provinces have used creative solutions to ensure government payments are recycled into the economy, and to help boost consumption.

Jianghi Province, the most populous region in the country, chose non-cash assistance, as each citizen received about $ 85, which could be spent over a period of three months.

But it came in the form of local currency that can only be spent in stores within the area, and not cash that can be saved.

"We used (money) to eat at local restaurants," said Lee Jong Hyang, a mother in her fifties. "We were eating out more than usual, in order to use the emergency funds."

Despite the relative success that South Korea has achieved so far, this country is still far from completely containing the virus and its repercussions.

It has recorded between 100 and 200 new cases, every day, for more than two weeks, which raised fears of a new outbreak.

Seoul was forced to restrict commercial activity, such as allowing restaurants to serve fast food after nine in the evening, and only serving ready-made drinks.

tightrope

South Korean President Moon Jae-in said that the government is walking a tightrope between controlling the virus and the economy, and after pressure from local companies, Seoul eased restrictions again, two weeks after they came into effect.

South Korea may be in for more economic pain than it anticipated.

The country's central bank last month lowered its forecast of a possible contraction of 1.3%, significantly different from its earlier, more positive estimates.

The second wave of the virus in South Korea is what caused the Organization for Economic Cooperation and Development to revise its initial assessment of growth to negative 1%.

As in many countries, officials are concerned about the sustainability of large fiscal stimulus packages, which can alleviate short-term pain, but at the expense of a build-up of long-term debt.

"Basically it is government support for the Korean people, but we cannot provide aid forever," Lee Dunn, an economist at Yonsei University in Seoul, said, adding, "Because of these subsidies, the Korean government's budget is deteriorating."

For South Korea, which has an export-oriented economy, this is a particularly acute risk, as the epidemic continues to reduce cross-border trade.

Korea relies a lot on international trade, and due to this epidemic, global trade has shrunk, and this has had a negative impact on the Korean industry.

"Unless we achieve a real breakthrough in the near future, this situation will be worse in the next few months," he said.

South Korea's hopes for a recovery next year depend on the rest of the world recovering from "Corona", and this is out of Seoul's control.

"Looking to the future, Korea is largely integrated into the global economy," said Lawrence Boone of the Organization for Economic Cooperation and Development.

• South Korea's President, Moon Jae-in, confirmed that the government is walking a tightrope between controlling the virus and the economy.

• South Korea recorded seven deaths per million people, while the United States witnessed about 600 deaths per million, according to the US Centers for Disease Control and Prevention and Johns Hopkins University.

Economic success went hand in hand with success in stemming the epidemic, in this Asian country.

• $ 12.2 billion pumped by South Korea to support businesses and citizens in early spring.

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