South Korea May Be Lucky to Grow by 5%

Posted by: Ihlwan Moon on January 22, 2008

There’s no doubt South Korea’s President-elect Lee Myung Bak has raised expectations for brisk economic activities with his pledged business-friendly policies. Yet his promise of lifting this year’s economic growth to 6% from an estimated 4.8% in 2007 by removing regulations and without stoking inflation appears increasingly wishful thinking.

Lee, a former chief executive of Korea’s best-known construction company, is banking on the expectations that big companies, sitting on a cash pile of some $60 billion, will start increasing their capital spending if red tapes are removed and restrictions on their investment in their affiliates are eased. But with looming threats of a U.S. recession, there are too many uncertainties to prompt export-reliant conglomerates to expand their investment in fixed assets.

In fact, the Bank of Korea, the country’s central bank, predicts the country’s capital investment growth will slow to 6.4% this year from 7.6% in the two previous years, dragging economic growth down to 4.7%. The market consensus is that with external environments worst in five years, South Korea would be lucky to grow 5%, not to mention Lee’s targeted 6%, which would be the highest since the economy expanded by 7% in 2002.

Lee’s transition team has tried to lower expectations for growth this year to 6% although he scored a landslide victory with a pledge to deliver 7% economic growth each year. Now it would be wise for Lee to focus more on changes aimed at improving longer-term efficiency of the economy, rather than trying to deliver 6% growth that may probably accompany excessive pump-priming measures at a time of high oil and raw material prices.

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