(Bloomberg Opinion) -- Two decades after South Korea’s swift economic response helped avert a devastating recession, the country is taking decisive steps to battle another slowdown, this one with a human cost as well.
The coronavirus, which has claimed more than 30 lives in South Korea and infected close to 6,000 people, lands new punches on an economy that was just beginning to find its feet after being caught in the U.S.-China trade conflict and a separate spat with Japan. Korea has more Covid-19 cases than anywhere outside China.
President Moon Jae-in unveiled a $9.8 billion extra budget this week to help businesses cope with the virus. He has described the situation as an emergency.
In recent weeks, Singapore, Italy, Hong Kong, China and the U.S. have all flexed at least some spending muscle to combat the outbreak. What could put Korea in a stronger position, however, is that its package comes as the fiscal spigots were already flowing: Its annual budget was the biggest ever, and a separate slate of measures were rolled out last week. Having less friction when it comes to deployment of government cash undoubtedly helps, especially when you consider the quibbles that tend to stymie U.S. Congress.
The largesse makes sense. Even with the extra stimulus, South Korea's sovereign debt levels are among the lowest in the Organization for Economic Cooperation and Development. The budget deficit will climb to 4.1% of gross domestic product, up from 1.9% in 2019, according to Bloomberg Economics. That is a sizable jump, but leaves the shortfall well below that of Japan and the U.S. Korea can borrow for 10 years at about 1.3%.
Of course, fiscal accounts can’t do all the heavy lifting. In the U.S. and throughout the Asia region, central banks have been cutting rates. This puts the focus squarely on the Bank of Korea, which stood pat in a shocking decision last week. A monetary response may well be forthcoming, but for now we’re looking at a country whose fiscal agenda is more proactive than its monetary policy — when usually it’s just the opposite. How long have we had to sit through lectures and read missives about insufficient deployment of the public purse? To the delight of the International Monetary Fund and other august organizations, Moon’s government has wised up.
In some sense, this decisiveness is reminiscent of South Korea's reaction to the Asian financial crisis in 1997-1998, only that was a move toward austerity. The economy underwent some painful reforms after getting a $60 billion bailout from the IMF, particularly relative to other big recipients — Thailand, Indonesia and Russia. Such measures included opening up to foreign investment, pulling back government spending and making it easier to hire and fire employees. Protesters took to the streets as unemployment climbed. But Korea’s grit paid off, and the country managed to repay its loan ahead of schedule.
Compare that with the chaos wrought during the 1990s in Indonesia, where political violence left deep scars. Russia, meanwhile, defaulted in 1998, throwing global markets into tumult. Thailand’s efforts to repair its economy and financial system were hampered by a revolving door of leadership and lax governance.
Korea’s show of political will isn’t just a sudden awakening by Moon. Pump-priming last year turned a poor economic performance into one that was merely mediocre. The economy expanded 2% in 2019, the slowest since the Great Recession. With trade conflict in detente, it looked like Moon could have reached a period of relative economic stability.
Years of demographic shifts make the country vulnerable to highly infectious disease. As I wrote here, South Korea's countryside is aging and depopulating, straining resources where the tax base is eroding. Almost half of Korea's 51 million people now live in the Seoul metropolitan area. Such proximity brings the potential for rapid disease transmission. (The bulk of the country's coronavirus cases are from the city of Daegu.)
No doubt this is a lesson in economics that Moon would prefer not be on the curriculum. What matters is how leaders respond to adversity. It helps enormously that the fiscal machinery had already cranked into gear — a stroke of luck Moon has been shrewd enough to exploit.
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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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