Lunch and Lecture with Subir Lall!

Thoughts after having lunch with Subir Lall, an expert on Korea at the IMF...

From Rice to Riches. (Like the rice pudding place in Soho!)
After the division of the Korean peninsula at the 38th parallel in 1945, the economy of South Korea was comparable to those of Cameroon, Ghana, and Malaysia. However, it effectively utilized foreign aid and pursued measures that would boost exports. Thus, South Korea established itself as the 16th largest economy by GDP by pursuing export-led growth. It has improved human welfare through what Robert Barro calls "capitalism without apology." As GDP per capita increased for Koreans, so too did domestic demand. This increased domestic demand may help Korea get through the financial crisis as it mitigates the sharp decrease in global demand. However, it is not enough to maintain medium to long term growth. Some issues that need to be addressed: rigid labor market, economic diversification, low savings rate.

The Labor Market
Although flexible labor markets can cause unemployment to be higher in countries like the U.S. than in countries like Korea (b/c it is much more difficult to fire people in Korea), in the long run, flexible labor markets promote long term growth through quicker and more efficient redistribution of resources. Dr. Lall commented that although the U.S. has done well in promoting flexible labor markets, it has not provided an adequate social safety net for times like these when the flexible market can cause unemployment to reach very high rates. Historically, the U.S. has relied on credit to serve as a social safety net. People would borrow against future earnings to get through times of frictional unemployment, etc. However, credit is not a guaranteed social safety net, as we discovered during the "credit crunch." Like the U.S., Korea also needs to expand and improve its existing social safety net. While doing so, it also needs to promote more flexible labor markets that will be necessary in order to allocate resources efficiently and promote long term growth.

The Government
One thing Korea has done well in the face of the crisis is execution. In the U.S., the passing of a fiscal stimulus bill does not immediately lead to a distribution of funds. However, when a fiscal stimulus bill is passed in Korea, they are quick to get funds where they are most needed.

Economic Diversification
Because Korea has depended on export-led growth for so long, its government is accustomed to providing incentives for export industries. However, these industries no longer need government support, and Korea might get more bang for the buck, or wham for the won?? if it were to provide incentives for entrepreneurs. Korea has an abundant supply of human capital and needs to find more outlets for its educated workers. Dr. Lall suggested that Korea pursue Silicon Valley type projects.

Korea also needs to expand its labor market and work its women! Korea isn't all that into gender equality, and I always tell my mom that I can't marry a Korean guy because I find them to be chauvinistic. I say this because I think it's kind of true, and also because it annoys her to no end that I don't date Korean guys. Haha.
Anyway, back to economics...productivity in non-tradable sectors stands at about 2%, while that of the manufacturing sector stands at about 4.6%. In order to compensate for the low productivity in the services sector, Korea needs to expand its labor market. It needs to include young people, old people, women...you get the idea.

Save, save, save!
If you go to outlet malls in New York or Boston, I promise, you will run into a group of Korean tourists. That's right. Outlet malls are a Korean tourist attraction. Why? Because Koreans are obsessed with designer clothes, bags, shoes, napkins...everything.

The Washington Post recently had an article about this phenomenon. At lunch, Dr. Lall mentioned the article, and I opened my bag and was like, "oh yeah! This article!" Haha. What a dork I am.
Anyway, low savings is dangerous in countries like Korea because the population is aging. Well, all populations age of course, but the birth rate is not high enough for the ratio of workers to old people to remain constant.

Wow! I'm amazed by how much I learned just by having lunch with Dr. Lall. I told him I felt like I was back at Wellesley sitting in a lecture. [a great thing for someone who is homesick for college!]

Crossword Puzzle #2!

HAPPY FRIDAY!!!


So much has been happening in DC! [Hillary hurting her elbow?! Hope she gets better soon!] There was the financial overhaul which included the death of the OTS, the scramble to cut costs from the health plan, the passage of the War Bill which included IMF funds, and the approval of the energy bill.


Today I went to the Korea Economic Institute for a panel lecture. The speakers were James Lister [VP of KEI], Minister Counselor Han [Korean Embassy], Subir Lall [IMF], and Leif Eskesen [IMF].

The IMF economists talked about why the fall of Lehman had such a profound effect on Korea's economy, even though its Korea's banks were relatively unexposed to bad derivatives. Korea is one of the most open economies in the world, and when investors pulled their money out of Korea, banks began to roll over their debt, and Korea was faced with a liquidity problem. Korea's economy is also heavily dependent on exports, and as global demand weakened, the volume of exports from Korea decreased.

But not to worry! Korea’s government reacted quickly and forcefully in order to prevent massive de-leveraging and subsequent adverse effects. It took measures to keep Korea’s banks highly capitalized, eased monetary policy, and increased fiscal stimuli as cross-border financing tightened. Although Korea recorded an economic contraction in Q4 of 2008, it recorded an expansion the following quarter, while many other advanced countries continued to contract. However, private demand must eventually take the place of fiscal spending, and Korea's economic recovery is largely dependent on a global economic recovery.

Minister Counselor Han then spoke about the benefits of the KORUS Free Trade Agreement and how the U.S. and Korea need to commit to free trade, especially during an economic downturn when protectionist policies can be particularly detrimental. Contrary to popular belief, the U.S. auto sector has much to gain from the KORUS FTA. KORUS FTA attempts to further level the playing field for U.S. made autos in Korea. Korea agreed to eliminate its 8% tariff on U.S. passenger cars immediately and to reduce non-tariff barriers to U.S. exported cars. Korea has also agreed to a “snap-back” policy which allows the U.S. to reinstate tariffs on Korean cars if Korea fails to uphold its commitments under KORUS FTA. Despite these conditions, the agreement continues to face opposition by many American carmakers.

M.C. Han pointed out that about 30% of the 675,139 Korean nameplate vehicles sold in the U.S. were produced within the United States, increasing employment in those regions where manufacturing plants were built. For example, the Hyundai plant in Alabama is a $1.4 billion investment that has created about 3,300 new jobs. The Kia plant in Georgia is a $1.23 billion investment that is predicted to generate about 2,500 new jobs.
He then held up this picture. That sign is on a lawn in Georgia.

Anyway, I got to ask Leif Eskesen questions later, and he was so nice! Maybe I should tell DJ Nabs to be friends with him.