Many people believe that Korea's economic performance is the fastest rise they've ever seen in a developing country. The Korean people have a right to be proud of their economic achievements, and developing nations are now looking to it as a model. Korea not only passed the milestone $10,000 per capita GNP in 1995, but a year later joined the ranks of the elite industrialized countries by being accepted as the 29th member of the OECD.

However, the worse-than-usual performance of the Korean economy last year leaves one with doubts about any rosy forecasts for the future. It is estimated that the nation recorded a balance of payments deficit of around $22 billion in 1996, and it is difficult to find any optimism in the numbers for this year. Apprehension among the populace and business circles began rising dramatically, as Korea's total accumulated foreign debt surpassed the $100 billion mark.

According to a recent study done by the Wharton Economic Research Institute in the U.S., Korea's balance of payments deficit reached a point higher than 4 percent of GDP, second in the world only to the United States and nearing the 5 percent "dangerous" level as defined by the IMF.

Consequently, the Korean government made deficit reduction one of the main items of its economic policy for 1997. Nevertheless, it is likely to fall victim to a classical economic problem: One can not catch three rabbits at the same time-inflation, economic growth and unemployment. In short, concentration on the deficit could lead to a slowdown in economic growth and rising unemployment. So reasonable economic measures must be taken, with attention to the overall equilibrium of the Korean economy. In addition, the Korean government might have difficulties in slowing economic growth this year, considering the impending Presidential Election. So pessimistic forecasts prevail and many expect that Korea will go through yet another year of slower growth.

The Bank of Korea reports that unless the government carries out a strong drive toward economic stability, it will be virtually impossible to reduce the deficit to the extent the government aims at, and the economy will deteriorate even further. The central bank also foresees that repercussions from the economic recession will spill over not only into business concerns but also households, as unemployment will increase in the wake of the long-run economic woes.

The Bank of Korea has made forecasts for some specific economic indicators for 1997.

Economic Growth
The growth rate of real GDP is estimated to have slowed to 6.9 percent in 1996 after 9.0 percent in 1995, and it is expected to slide further to 6.4 percent this year. It is the lowest rate in four years, since a 5.8 percent rate was recorded in 1993. Private sector consumption will increase only 6.0 percent, influenced by the cooling-down of economic activities. Investment in equipment and facilities will increase 3.7 percent, down from an estimated 5.5 percent last year, as the motivation for investment among enterprises will be weakened and most needs for investment in equipment and facilities are already fulfilled. Meanwhile, investment in construction is expected to record a 6.3 percent increase, slightly higher than last year's estimated 6.0 percent thanks to large-scale investments into social infrastructure.

Balance of Payments
The balance of payments will record a deficit of $18 billion, 3.4 percent of GDP this year, which will have decreased somewhat compared to last year's projected deficit of $22 billion, but still not to the extent many would like to see. The trade deficit will be reduced to $8.7 billion from $14 billion, as exports are expected to show some recovery, while the increase in imports will slow. Nevertheless, the balance of payments in non-trade and transfer income is expected to record a deficit of $9.3 billion, overtaking last year's $8 billion deficit.

Price-Employment
Consumer prices are expected to increase 4.7 percent in 1997, compared to an estimated 4.5 percent of 1996, as the wage hikes of last year, the depreciation of the won and pent-up pressure for price increase in the service sector including public utility charges are to show impact. The increasing unemployment rate will rise as a hot issue. The Bank of Korea sees the unemployment rate for 1997 at 2.2 percent. However, one can not exclude the possibility of unexpectedly higher unemployment, as most enterprises will certainly go lean to meet challenges from the long-run economic recession.

Forecasts for Industrial Sectors
The forecasts for industrial sectors in 1997 take on a relatively pessimistic tone compared to the past. However, a consensus is forming that a trend toward recovery will become more tangible,since most industrial sectors are likely to enter a recovery phase beginning in the second half of 1997. Forecasts for major industrial sectors in 1997 were summed up by Korea Institute for Industrial Economics and Trade (KIET) as follows: The recession in the fields of automobiles, shipbuilding and consumer electronics will continue, while other industrial sectors are expected to show recovery spurred by the demand in the domestic market and exports. It seems that the trend for recovery in every industrial sector will accelerate, especially in the second half of 1997, at which time yen depreciation is expected to slow and overall economic activities will swing around into a recovery phase.

The automobile sector is likely to undergo an export slowdown and less demand in the domestic market along with an aggressive on-rush of low-priced compact cars manufactured by other advanced countries. In the shipbuilding sector, exports and production will decline sharply in the slump, even though the placement of orders for delivery in 1999 is expected to show recovery. In the case of consumer electronics as well, the current strait-jacket situation will be further intensified in the aftermath of slumps in exports and domestic demand.

Meanwhile, other sectors will enter into a phase of recovery. In the electronic parts sector, exports, domestic demand and production will all record higher growth than last year, centered around large-size electronic parts. Exports of computers are forecast to rise, thanks to the expansion of investment in information technology in foreign countries, while the increasing demand for notebook computers is expected to lead to a production hike. The telecommunications sector is predicted to show a good export record as well as local sales, since demand for telecommunications equipment by new operators of mobile phone systems will continue increasing, and Korean enterprises will aggressively expand into overseas markets.

Semiconductor prices are expected to continue their downward spiral. The average price of a 16 mega DRAM in 1997 is calculated at $8, a leap-backward from the estimated $18 average of 1996. However, beginning from the second half of 1997, the process of replacing the 16 mega DRAM with the 64 mega DRAM should go into full swing. Therefore exports of semiconductors are expected to show an increase in terms of volume, and recovery in price as well. As a result, exports will record a U-turn from negative growth to positive.

In the sector of general machinery, production as well as local demand will show an upward trend, positively influenced by the recovery of the overall economy, and the export increase is expected to be higher than in 1996. In the iron and steel sector, the domestic market will continue to stagnate, but will shift to recovery in the second half of the year, as there are no prospects for an increase in facility investment in Korea. Meanwhile, exports of iron and steel in terms of volume will increase considerably compared to last year, reflecting the inventory that accumulated due to the domestic slump. Iron and steel prices will remain generally stable over the first half of 1997, then begin to rise slowly in the second half.

In the petrochemical sector, production is likely to show an increase, as the production facilities finished this year go into a full-blown operation. Exports are also expected to show a good record, as a result of the production expansion and slow local demand. Considering the expected stable price level of petrochemicals at least until the last quarter of this year, the unit increase in exports will keep pace with that of dollar amount. Exports of textiles will show only a humble increase over 1996, even though exports of chemical fiber fabrics to Hong Kong will record a dramatic increase.

A Narrowed Scope of Policy-Making Options
Predictions for Korea's 1997 economy naturally show some deviation from one economic research institute to another. Nevertheless, all the institutes unanimously indicated that this year, like 1996, will see difficult economic times compared to the past years of economic boom. Considering such a situation for the Korean economy, the economic policies of the Korean government have become all the more important as leverage for economic recovery, and will have a considerable impact on the economy. But, there seems to be only a narrowed scope of policy-making options.

Some of economic goals of the Korean government in 1997 are expected to be: GDP growth of 6.5 percent; a balance of payments deficit of only $15 billion; an increase in consumer prices of 4.5 percent; etc. The government maintains that it should employ a balanced economic policy, refraining from a shifted and concentrated policy centered around one objective among a variety of macroeconomic indicators such as the balance of payments, economic growth, inflation, etc., while it will do its best to prevent excessive economic recession and unemployment.

Now that economic recovery has become a paramount task to grapple with, the government and private enterprise are certain to make an all-out campaign to heighten productivity and terminate the trough phase in the economic cycle as early as possible, regardless of the impending presidential election to be held in December, 1997.

by Soo-Young Jang