For world economy, a year of divergence

First published in The Korea Herald.

As we step into 2015, it would appear that on the back of a U.S. economic recovery, the dark days of the financial crisis are behind us. As the largest economy, accounting for more than one-fifth of global gross domestic product, the health of the U.S. economy has been critical for steady growth in the rest of the world through trade, foreign investment, financial markets and capital flows. Until now.

But, as recent developments have shown, going ahead, there are many more variables that will impact the global economy. Leave aside the fact that the International Monetary Fund has projected the global economy to grow by 3.8 percent in 2015, a little better than the estimated pace of 3.3 percent for the previous year.

Europe continues to deleverage with serious risks of falling back into a recession, Japan’s prospects remain clouded despite “Abenomics,” China’s growth is slowly throttling back, and Latin America and Southeast Asia remain a mixed bag, while India’s growth prospects are up in the air. The health of the world’s important economies is clearly diverging, and to understand this better we need to look at the prospects in all the major economic blocs.


Still miles to go

The world’s largest economy is still climbing out of the deep hole created by the recession with an annualized growth rate of around 2 percent over the past five years. However, over the last few quarters, the pace of growth has picked up and the broad consensus is that the U.S. economy is back on track.

The U.S. economy grew at a much faster pace than initially thought in the third quarter of 2014, with the Commerce Department raising its GDP growth estimate to a 3.9 percent annual pace from the 3.5 percent rate reported previously.

There is no doubt that the economy has hit a pivotal point, with many positive developments ― consumer confidence, the manufacturing sector in an expansion mode, strong corporate balance sheets, firmer global trade, less fiscal drag, a stronger job market and falling oil prices.

U.S. consumers also appear to be in better financial shape, with household debt falling. The fiscal restraint that has held back growth in recent years has more or less ended and the federal budget deficit is now at a consistent level as shown by the slowly declining federal debt-to-GDP ratio.

To top it off, businesses are once again hiring and investing, as a result of which the job market is quickly picking up and wage growth is reviving. With more money in their pockets, it will lead to more spending and fuel even more business expansion. The volatile housing sector is currently in much better shape with the number of foreclosures continuing to fall. Adding to consumers’ purchasing power is the sharp decline in oil prices.

The key to its economic story this year will be how fast the Federal Reserve raises interest rates, and the ensuing market reaction. Tapering of the Fed’s quantitative easing program has already begun, although an actual tightening is likely to take some time. It does appear though that the interest rate will remain near zero percent ― where it has been for six years ― through mid-2015.

With the economy in good shape, everyone is hoping that the global economy will move forward. Of course, geopolitical events overseas, and the domestic political wrangling between the Democrats and Republicans could put a wrench in the works.


Clouds across the Atlantic

Across the Atlantic, except for the United Kingdom, which is experiencing steady growth that will likely continue, the situation in the European Union does not appear too rosy. The eurozone is back in an economic rut with Germany, France and Italy still battling Depression-era levels of unemployment and the threat of deflation.

It appears that the European banking system has never really recovered from the financial crisis. As such, Europe’s slow economic recovery, which began in the second quarter of 2013, remains fragile.

Only recently, the IMF marked down prospects in the three largest economies ― Germany, France and Italy ― which it says are headed into their third consecutive year of recession. The fund warned that the probability of the eurozone reentering a recession has increased.

The German economy grew by 0.1 percent in the third quarter of 2014. Another quarter of contraction would have meant that Germany was officially in a recession. France reported 0.3 percent GDP growth, rebounding from a 0.1 percent decline in the second quarter and thereby avoiding falling back into a technical recession. Italy was not so lucky, with a contraction of 0.1 percent confirming that the economy has entered a technical recession.

The European Commission has observed that the eurozone would need another year to reach even a modest level of growth. The main risk, it has said, is that stalling or partial implementation of structural, fiscal and institutional reforms by member states may result in low actual and potential growth and protracted high unemployment. Moreover, the debt overhang, the investment shortfall in recent years and slowing total factor productivity could hurt growth in the medium term if they are inadequately addressed by structural reforms, resulting in an extended period of low growth. Deflation is another serious threat.

As regards the U.K., although the economy is in a recovery phase, household indebtedness is high and the fiscal position weak. Experts have noted that additional growth may be held back by continued difficulties in generating a trade-led recovery in addition to the austerity measures that will be needed. While the recovering economy is boosting tax receipts for the government, high levels of spending are keeping the deficit high.

U.K. economic growth slowed in the third quarter of 2014, with the economy expanding by 0.7 percent, weaker than the 0.9 percent expansion recorded for the second quarter, according to the Office for National Statistics.

Added to this is the uncertainty posed by the 2015 general election, which many expect to result in a hung parliament. That would be a challenge, more so as its relations with the EU are becoming increasingly strained.


Gloomy situation

Meanwhile, the disappointment continues in Japan, where Prime Minister Shinzo Abe has emerged stronger after the snap polls, even as the economy entered into technical recession amid growing concerns that the government is failing to pull the country out of decades of stagnant growth and deflation.

Japan’s economy shrank an annualized 1.6 percent in Q3 2014, confounding expectations of a modest rebound after a severe contraction in the previous quarter.

Less than two years into Abenomics ― a three-pronged strategy to pull Japan out of two decades of stagnation through monetary stimulus, fiscal flexibility and structural deregulation ― the program has yet to spark sustained growth. As he currently holds a comfortable majority in the parliament it is likely that he will give a greater push to his policies. It needs to be seen whether the Bank of Japan’s second round of quantitative and qualitative easing will result in substantial boost to the economy.

It is highly likely that Abe will turn his attention to designing a 3 trillion yen ($25 billion) fiscal stimulus package to help to revive growth, but the economy will continue to turn in a subpar performance this year.

Analysts note that the continuation of loose fiscal policy and aggressive monetary easing could cause a loss of confidence in Japan’s ability to maintain debt sustainability. So we’ll have to wait and watch.


Shaky foundation

The situation in BRICS is a mixed bag, and the foundation appears a little shaky.

Brazilian President Dilma Rousseff was reelected by a small margin in the October elections for a second four-year term, even as the economy technically exited recession. However, virtually no growth in 2014, double-digit interest rates and inflation breaching the government’s own target bands all paint a grim picture.

Brazil’s economy officially exited recession with growth of 0.1 percent in the third quarter of 2014.

It is expected that fiscal discipline and growth-enhancing measures will take priority, even though Rousseff pledged further support for subsidies and social programs during her election campaign. A stable government, and a new finance minister operating with a greater degree of autonomy, could just ensure that the framework is in place for a more authoritative and credible response.

Economists have noted that the widening fiscal and current account deficits will require both policy adjustments and market-driven asset price corrections. On the other hand, weaker labor market dynamics, softer Chinese demand, slower credit growth and a failure to advance structural, growth-enhancing reforms are risks that would undermine growth. Stimulating growth while getting the country’s finances in order will take up much of the year. There is no doubt that the Brazilian economy will remain fragile as a new team introduces policy adjustments to build confidence.

Meanwhile, Russia’s energy-dependent economy has suffered a severe economic shock over the past few months, largely because oil prices have tanked. The conflict in Ukraine and the international sanctions have also weighed heavily on the economy, which is forecast to be flat next year. The weaker ruble and Russian countersanctions on Western food imports are likely to push up inflation and hold down household consumption. The ruble has already lost close to 50 percent in value as we enter the new year.

Economic growth in Russia slowed to 0.7 percent in the third quarter of 2014. Falling oil prices and sanctions should continue to be headwinds going forward.

The Russian government, in an official statement that was hurriedly withdrawn, has warned the economy will fall into recession next year as Western sanctions, in response to its role in eastern Ukraine, and falling oil prices begin to bite. Household disposable income is also forecast to decline.

The World Bank stated in its economic outlook that, “In the baseline scenario, investment is projected to contract for a third year in a row in 2015, because of continued uncertainty, restricted access to international financial markets by Russian companies and banks, and lower consumer demand.”

The situation is different for India. Confidence in the economy has soared in recent months under the leadership of its new prime minister Narendra Modi, who appears to be genuinely working to pull the country out of the economic mess brought about by his predecessor. However, there is concern about economic growth, as the pace of reform has been slower than expected. To facilitate rapid economic growth, structural reforms would be necessary, but the ruling party’s weak position in the upper house limits the scope for any major change. Experts note that growth is still uneven and weak overall and remains susceptible to many downside risks.

However, they do agree that, with economic activity buoyed by expectations from the newly elected government, India is benefiting from a “Modi dividend.” Structural reforms related to land, labor and tax would support the economy’s growth. Private investment is expected to pick up thanks to the government’s business orientation, and declining oil prices should boost private-sector competitiveness.

GDP growth in the third quarter of 2014 slowed to 5.3 percent from 5.7 percent in the previous quarter. However, this was better than expected.

As for Asia’s largest economy, China is having trouble maintaining the kind of growth it has become accustomed to in recent years. The most recent readings suggest that its economy could grow at roughly 7.5 percent this year, down from the 10 percent growth it averaged for two decades before the slowdown began three years ago.

As Goldman Sachs pointed out in a recent note, it’s been a bumpy ride for China’s economy in 2014, with multiple growth scares followed by bouts of policy stimulus, and this year will be no different.

“A housing market adjustment, decelerating credit growth and an advancement of difficult structural reforms in areas such as local government debt management and interest rate liberalization, will present continued headwinds,” Goldman Sachs reported.

The real estate sector, of course, remains a key uncertainty, and as weakness builds up it will pose a risk to the economy.

Having said that, on the bright side, the continuous reform and opening-up of China’s economy may help the country transition into a more sustainable and market-driven economy. The government has already started implementing many financial-sector reforms, which are only going to increase this year.

The Chinese economy grew at 7.3 percent during the third quarter of 2014 compared with a year ago, slightly exceeding expectations.

South Africa for its part is battling strikes, higher interest rates, rising inflation and weak demand, which will weigh down its economy. The risk of strikes will remain high, exacerbated by the political power of the trade unions and high unemployment. Sound fiscal and monetary policies, and infrastructure investment may facilitate overall activity, and economic growth could gradually pick up pace.

Last year, a prolonged strike in the platinum sector and other labor actions disrupted the mining and auto sectors. This has hurt business confidence and the impact is still being felt, although economists think growth has a good chance of rebounding.

The GDP in South Africa expanded 1.4 percent in the third quarter of 2014 over the previous quarter.

Recently President Jacob Zuma said that through Operation Phakisa, the country is poised to reach the ambitious economic growth target of 5 percent by 2019. Operation Phakisa focuses on unlocking growth and new jobs in the country’s ocean economy.


A mixed bag

Coming to the ASEAN heavyweights now.

The World Bank has projected that Thailand will generate the lowest economic growth in the region next year because of structural problems in the export sector and unresolved political issues. Domestic demand in Thailand remains weak despite the government’s efforts to boost growth by increasing budget spending. In addition, tourism is being negatively affected by the imposition of martial law, which is not expected to be lifted any time soon. Recently, the government declared that democratic elections, which were originally planned for late-2015, will be postponed to early 2016 as the new constitution will not be ready in time.

Southeast Asia’s second-largest economy grew 1.1 percent in the third quarter of 2014, from the previous three months, and 0.6 percent from a year earlier.

On the bright side, military rule could improve political stability and it is expected that big infrastructure projects will lead to a slight uptick in economic growth this year.

Malaysia is likely to remain on a sustainable growth path. On Dec. 1, fuel subsidies were officially dropped and prices are now linked to global rates. This is the latest in a series of moves designed to trim the fiscal deficit, and comes just months before a new goods and services tax will be introduced.

Malaysia’s economy posted growth of 5.6 percent in the third quarter of 2014 from the corresponding period a year ago, slowing down from the 6.2 percent in Q1 and 6.5 percent in Q2.

Experts have noted that while the government is showing strong commitment to improving its financial standing, there is concern that these measures will put a damper on private consumption in the following year. Weak demand for Malaysia’s commodity exports and falling oil export revenues due to the current global price slump also pose an important risk to growth in the near term.

In Indonesia, the new government led by President Joko Widodo increased the price of subsidized fuel by one-third recently, in a bold move that bodes well for efforts to reduce the fiscal and current-account deficits. It will also free up public funds for infrastructure development and expanded welfare services.

Indonesia’s gross domestic product grew 5.01 percent in the third quarter of 2014 from a year earlier, its slowest in five years.

Future growth will largely depend on whether the country’s new government is able to push through policy reforms. These include boosting infrastructure development, improving regulatory certainties in doing business and reducing the country’s poorly targeted energy subsidy spending.

A tepid and uneven global recovery tempered Singapore’s economic growth last year, which was also affected by the government’s push to reduce a politically unpopular reliance on foreign workers. That has led to a tight labor market and raised business costs. In addition, Singapore saw its fourth antigovernment rally in less than two years, in an indication that Singaporeans are becoming more politically engaged.

The country’s economy expanded by 2.4 percent in the third quarter of 2014, unchanged from the previous quarter.

According to economists, externally oriented sectors such as the manufacturing and transport and storage sectors are likely to slow while growth in the construction sector will continue to be weighed down. However domestically oriented sectors like business services are likely to remain resilient.


Bright Down Under

Australian Prime Minister Tony Abbott has successfully repealed carbon and mining taxes and has concluded free-trade agreements with Japan, South Korea and China. Despite fiscal tightening, the economy is expected to strengthen as mineral export volumes rise and consumers regain confidence.

Australia’s economy, though, grew at a slower-than-expected pace in the third quarter of 2014, at 2.7 percent, underscoring growing concerns about its outlook and calls for the central bank to undertake easing measures.

According to economists, macroeconomic policies are appropriate for the current juncture while long-term prosperity depends on ensuring that structural settings boost all forms of economic activity and promote broad-based productivity growth.

At the same time, lower commodity prices could weigh on profits and wages, while also reducing both company taxes at the federal government level and royalties at the state level. This would in turn constrain consumer spending and business investment, and lead to an extended period of weaker-than-usual growth in public demand. On the whole, however, the prospects are bright.

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Millennium Development Goals: Not there yet

First published in The Korea Herald.

The New Year is significant when it comes to the issue of sustainable economic growth and the promises made by world leaders 14 years ago that have not been fully kept.

World leaders, in adopting the United Nations Millennium Declaration in 2000, pledged to create a more equitable world by 2015. However, today, more than ever before, it seems that the wealthiest individuals have become wealthier while the relative situation of people living in poverty has improved little.

Disparities in education, health and other dimensions of human development still remain large despite marked progress in reducing the gaps. Various social groups suffer disproportionately from income poverty and inadequate access to quality services and, generally, disparities between these groups and the rest of the population have increased over time.

The implications of rising inequality for social and economic development are many. There is growing evidence and recognition of the powerful and corrosive effects of inequality on economic growth, poverty reduction, social and economic stability, and socially sustainable development.

The many adverse consequences of inequality affect the well-being not only of those at the bottom of the income distribution, but also those at the top. Specifically, inequality leads to a less stable, less efficient economic system that stifles economic growth and the participation of all members of society in the labor market.

According to a new report by the OECD, the situation is so bad now that global income inequality has returned to levels recorded in the 1820s ― when the Industrial Revolution produced sizable wealth gaps between the rich and poor.

The study uses historical data from eight world regions to examine 10 individual dimensions of well-being, tracking them over time and space, then pulls them together in a new composite indicator. The dimensions covered reflect a broad range of material and nonmaterial aspects: per capita GDP, real wages, educational attainment, life expectancy, height, personal security, political institutions, environmental quality, income inequality and gender inequality.

It reveals that great strides have been made in some areas, such as literacy, life expectancy and gender inequality, but while income inequality, as measured by pretax household income among individuals within a country, fell between the end of the 19th century until around 1970, it began to rise markedly at that point, perhaps in response to globalization.

Another OECD report suggests that reducing income inequality would boost economic growth. It found that countries where income inequality is decreasing grow faster than those with rising inequality.

“The single biggest impact on growth is the widening gap between the lower middle class and poor households compared to the rest of society. Education is the key: A lack of investment in education by the poor is the main factor behind inequality hurting growth.”

Rising inequality is estimated to have hold back growth in Mexico and New Zealand by more than 10 percentage points over the past two decades up to the Great Recession. In Italy, the United Kingdom and the United States, the cumulative growth rate would have been 6-9 percentage points higher had income disparities not widened, and inequality also reduced growth in Sweden, Finland and Norway, although at low levels. On the other hand, greater equality helped increase GDP per capita in Spain, France and Ireland prior to the crisis.

The impact of inequality on growth stems from the gap between the bottom 40 percent and

the rest of society, not just the poorest 10 percent. Anti-poverty programs will not be enough. Cash transfers and increasing access to public services, such as high-quality education, training and health care, are an essential social investment to create greater equality of opportunities in the long run.

The report also found no evidence that redistributive policies, such as taxes and social benefits, harm economic growth, provided these policies are designed, targeted and implemented well.

So is the situation really that bad?

Over the past 14 years, since the adoption of the Millennium Development Goals, the U.N. has stated that there has been important progress, with some targets already having been met well ahead of the 2015 deadline.

The MDGs are the world’s time-bound and quantified targets for addressing extreme poverty in its many dimensions ― income poverty, hunger, disease, lack of adequate shelter and exclusion ― while promoting gender equality, education and environmental sustainability. They are also basic human rights ― the rights of each person on the planet to health, education, shelter and security.

They are eight goals that all 191 U.N. member states have agreed to try to achieve by the year 2015: eradicating extreme poverty and hunger; universal primary education; promoting gender equality; reducing child mortality; improving maternal health; combating HIV/AIDS, malaria and other diseases; ensuring environmental sustainability; and developing a global partnership for development.

The 2014 MDG report notes that several targets have been met. According to it, the world has reduced extreme poverty by half, efforts in the fight against malaria and tuberculosis have shown results, access to an improved drinking water source became a reality for 2.3 billion people, disparities in primary school enrolment between boys and girls are being eliminated in all developing regions and the political participation of women has continued to increase. It also states that development assistance rebounded, the trading system stayed favorable for developing countries and their debt burdens remained low.

Having said that, while claiming that substantial progress has been made in most areas, it also agrees that much more effort is needed to reach the set targets.

Major trends that threaten environmental sustainability continue, also, more efforts are also needed to decrease chronic undernutrition among young children, reduce maternal mortality and improve sanitation. None of these goals can be achieved in the last year left for the MDGs.

Continued progress toward the goals in the remaining year is therefore essential to providing a solid foundation for the post-2015 development agenda.

The opportunities that 2015 presents for bringing the countries and people of the world together to decide and embark on new pathways forward are historic and unprecedented. These decisions will determine the global course of action to end poverty, promote prosperity and well-being for all, protect the environment and address climate change.

The actions made this year are expected to result in new sustainable development goals to follow the eight MDGs. This post-2015 development agenda is expected to tackle many issues, including ending poverty and hunger, improving health and education, making cities more sustainable, combating climate change, and protecting oceans and forests.

Governments are in the midst of negotiating, and civil society, young people, businesses and others are also having their say in this global conversation. World leaders are expected to adopt the agenda at the Special Summit on Sustainable Development in New York in September 2015.

Hopefully, there will be speedier progress in 2015.

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Korea should rethink trickle-down policies

First published in The Korea Herald.

It is no secret that the Park Geun-hye administration and the ruling Saenuri Party are vehemently against raising corporate taxes, arguing that higher taxes could affect economic growth. They instead want to go easy on the corporate sector and the wealthy, all in the name of trickle-down economics ― a theory closely identified with Reaganomics, which states that decreasing tax rates especially for corporations, investors and entrepreneurs can stimulate production in the overall economy.

So it may come as a surprise to them that the latest OECD working paper released on Dec. 9 strongly denounced the trickle-down theory while pushing for higher taxes on the rich and policies aimed at improving the lot of the bottom 40 percent of the population. Coming from an organization of the “elite” countries, it must really mean something for the Korean policymakers.

Drawing on harmonized data covering the 34 OECD countries over the past three decades, the econometric analysis in “Trends in Income Inequality and its Impact on Economic Growth” suggests that income inequality has a sizable and statistically significant negative impact on growth, and that redistributive policies achieving greater equality in disposable income have no adverse growth consequences.

Further, it suggests that it is inequality at the bottom of the distribution that hampers growth. Additional analysis suggests that one key channel through which inequality negatively affects economic performance is through lowering investment opportunities ― particularly in education ― of the poorer segments of the population.

These findings have relevant implications for Korea, which is grappling with slow economic growth.

“On one hand, it points to the importance of carefully assessing the potential consequences of pro-growth policies on inequality: focusing exclusively on growth and assuming that its benefits will automatically trickle down to the different segments of the population may undermine growth in the long run inasmuch as inequality actually increases. On the other hand it indicates that policies that help limiting the long-run rise in inequality would not only make societies less unfair, but also richer,” according to the report.

“In particular, the analysis highlights the importance of two pillars of a policy strategy for tackling rising inequalities and promoting equality of opportunities. One policy avenue to reduce inequality involves reforms to tax and benefit policies,” the paper notes.

“As top earners now have a greater capacity to pay taxes than before, governments may consider reexamining their tax systems to ensure that wealthier individuals contribute their fair share of the tax burden.”

It adds that the unequal tax treatment of income from different asset classes increases inequality in some cases and distorts the allocation of capital.

Undoubtedly, this is very valuable advice for Korean policymakers, and something they should heed.

That is not all. A recent survey by Statistics Korea found that from 2011 to 2013, more than 3 million people fell into relative poverty, with their households earning less than half of the median income. In addition, according to the OECD Economic Survey 2014, Korea’s middle class is shrinking and its relative poverty rate is the eighth highest among the 34 member countries.

As some experts have noted, the major sources of rising income inequality are closely related to the neoliberal transformation of the Korean economy. The neoliberal reform of the labor market over the past decade and a half produced a sharp cleavage between regularly employed workers and nonregular workers. The Korean working class, which used to be relatively homogeneous in terms of the job market and wage conditions, has become internally divided, and this reflects growing income inequality in the country. It is therefore essential to address the underlying causes by reducing the share of nonregular workers.

Furthermore, in recent years, the significant income disparities that have long existed between the chaebol and SMEs have become even greater.

Due to economic structural problems, the rigidity of the regular labor market and an environment that favors temporary employment, the creation rate of stable, decent jobs has waned.

Also, factors pushing fundamental inequalities are increasing while Korea’s redistribution remains poor due to weak welfare policies. Although the government has long talked about redistribution, and President Park has long touted her welfare pledges, the pace at the ground level is really slow.

Ignoring the widening income inequalities in Korea, the government appears to be only paying lip service to income redistribution and social welfare while focusing on efforts to reinvigorate the economy.

Park recently pledged to expand social welfare programs without raising taxes, something that is not feasible. The government and the ruling party should not be afraid that introducing excessive welfare measures and tampering with tax rates will rein in economic growth.

Korea should focus on inequality at the bottom income bracket in an earnest way. As has been widely acknowledged, the size and nature of the Korean welfare system is currently unsatisfactory, and there certainly is a need to expand and improve it. This should go hand in hand with strengthening the progressive tax and expanding the sources of taxation ― not just by raising taxes for the poor smokers.

Public welfare spending takes up 10 percent of GDP, close to half of the 21 percent average among OECD members. The prospects for declining economic inequality in Korea in the near future are very dim and over the years the welfare cost will increase. On the other hand, the tax rate is equal to 20 percent of the GDP, lower than the OECD average of 25 percent.

Clearly, it is time the government took a hard look at its trickle-down policies.

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Validity of deflation concerns in Korea

First published in The Korea Herald:

With the latest consumer price index showing a further decline in Korea’s inflation rate, the scaremongers are having a field day. While some suggest that the country is staring at deflation, others are going so far as to suggest that Korea has to brace itself for a “lost decade,” similar to what Japan faced.

A government report released on Tuesday showed that Korea’s consumer prices grew at the slowest pace in nine months in November. The CPI rose 1 percent last month from a year earlier, slowing from October’s 1.2 percent gain, the lowest rise since March.

The Statistics Korea data showed that from a month earlier, the price index also inched down 0.2 percent, the third straight on-month decline. The core inflation, which excludes volatile oil and food prices, rose 1.6 percent on-year, the slowest increase since August 2013, when it gained 1.5 percent.

Technically speaking, Korea is experiencing a period of temporary decrease in prices, or disinflation. Historically, the country has avoided long periods of declining prices, so it is natural that when it experiences disinflation, economists and policymakers start getting cautious. More so since just next door, Japan experienced disinflation in the first half of the 1990s, which expanded to deflation from 1994 through 2004, bogging down its economy; and therein lies the concern.

However, we should not start confusing the concepts of deflation and disinflation.

Deflation is characterized by a sustained aggregate fall in the Consumer Price Index or gross domestic product deflator. A sustained price fall can exert more or less permanent influence on a country’s economy with consumption and demand remaining sluggish.

The reasoning is simple: During deflation, if consumers and corporations expect prices to go down, they will often delay purchases, waiting for a better price, which in turn will dramatically slow down demand, causing prices to drop further. This leads to a downward spiral that reduces the circulation of money through the economy, which may limit growth.

Moreover, it generally occurs during long periods of high unemployment, industrial overcapacity, stagnant wages and falling labor costs. High unemployment leads to lower aggregate consumer demand for goods and services. As demand decreases, businesses generally lower the prices of their goods and services. Over time, lower prices can result in less cash flow and profits for companies, which then are inclined to reduce or postpone hiring and initiate layoffs.

The concerns of the deflation scaremongers in Korea are valid, no doubt, but at the ground level, there is a marked difference in what Korea is experiencing now and what Japan experienced in the ’90s.

True, prices are decreasing, economic growth is low and private consumption is down, but then there are valid explanations for these.

In Korea, the slowing price hikes are attributable in large part to falling international crude oil costs, which puts downward pressure on many product prices. The data referred to earlier showed that oil prices in November dropped 7.7 percent on-year and 2.7 percent on-month. Affected by the falling energy costs, factory product prices inched down 0.1 percent in November from a year earlier.

There are outside influences on core commodities that move prices and cause them to stay unnaturally low or high.

With regards to low GDP growth, any economic upheaval in China, the U.S or the eurozone has a great impact on Korea’s economy since it is mostly export-driven. That is precisely the reason for the slow growth.

The Korea International Trade Association has forecast that Korean exports will top the $600 billion mark for the first time ever in 2015 thanks to the faster pace of global economic growth and trade. The landmark figure represents a 4.3 percent increase from the expected $576 billion worth of goods to be exported this year.

There is not much the government can do directly on the trade front to revive the economy. It can, of course, try to stimulate the economy by reviving consumer demand, which it is trying to do. The results will take time and cannot happen overnight.

Further, as noted earlier, deflation generally occurs during long periods of high unemployment, industrial overcapacity, stagnant wages and falling labor costs. That is not the case in Korea.

The country’s official jobless rate was 3.2 percent in October, unchanged from the previous month and up from 2.8 percent a year earlier. The per capita real wage for salaried workers was 2.95 million won per month in the third quarter, inching up 0.08 percent from 2.94 million won over the same period last year.

The OECD seems to be more bullish on the Korean economy and policies than the local experts and economists. In its latest country report, the OECD forecast that Korea’s economy would grow 3.8 percent in 2015 on the back of the government’s fiscal stimulus and monetary policy easing. The inflation rate will reach 2.2 percent next year, private consumption will grow to 3 percent and exports may rise 4.9 percent.

The Bank of Korea still has room to become more aggressive in quantitative easing if growth continues to falter. On Dec. 11, the central bank is slated to announce its decision on whether it would further lower the current interest rate of 2 percent following previous rate cuts in August and October.

The irony is that while many experts are calling for more cuts now to stimulate the economy and avoid deflation, there are even more who are against it because of its impact on household debt. The BOK is damned if it does and damned if it does not.

Theoretically, deflation is hard to predict and almost impossible to verify until it has set in. It also makes it difficult to determine if it is really all that bad for the economy.

It may sound strange, but deflation can also be perceived to have positive effects. After the 2008 financial collapse of Ireland and the resulting recession, deflation was treated as a temporary condition that allowed for an improvement in competitiveness and balancing the budget. Additionally, moderate deflation may benefit savers and investors because the value of their assets appreciates and the immediate impact is an increase in purchasing power.

Either way, it is also possible that some deflation may be a normal part of our economic cycle, and is not always such a bad thing.

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