Post-pandemic world economic environment

Professor Kwak Soo-il, who is widely respected for his contribution to management science in Korea and is now a member of the National Academy of Sciences, and professor Cho Nam-shin, who teaches management at the Hankuk University of Foreign Studies, invited me to give a presentation to members of the Korea Management Development Institute.

Today’s article is a summary of my May 27 presentation, which was given via Zoom as I’m in the Washington, D.C. area in the U.S.

One graph that best describes the problem from the killer virus is the Weekly Economic Index released May 5 by the Federal Reserve Bank of St. Louis. The index is based on 10 different daily and weekly series covering consumer behavior, the labor market and production.

Questions that the graph poses include how bad the economic impact will be, when the end of the virus will come, and how the economy will look when it ends.

The Congressional Budget Office projects the U.S. economy will decline by about 12 percent during the second quarter of this year, which is equivalent to an annual rate of decline of 40 percent.

Globally speaking, the Organization for Economic Cooperation and

Development (OECD) predicts that the intensity of the China impact will repeat in advanced economies, severely hitting confidence, travel and consumer spending.

Global growth, projected earlier at 3 percent in 2020, was lowered to 1.5 percent. The OECD predicts recovery will be gradual throughout 2021. The OECD further states that the impact would be greater if the shutdown lasts three months or more.

Disruption in the supply chain is a major concern of many and surfaces in places rarely expected.

According to the May 3 issue of the Washington Post, 45 percent to 50 percent of pharmaceutical products were carried in passenger planes. When passenger flights were cut, shipment of these products also was cut, making them more expensive.

A really big question that troubles many is whether there will be a major exodus of supplier firms from China to either their home countries or other countries that are less disruptive politically.

If there is a significant exodus of supplier firms from China, the impact could be very serious, especially in China. The number of unemployed would increase by a large number, which could pressure political leaders, resulting in demands for their replacement.

Further, if the exodus leads China to experience a shortage of money and demand payment from about 100 countries that borrowed over $400 billion from the nation, a new financial crisis may erupt. Many of these countries are too poor to pay back the loans to China. These countries will either go bankrupt or turn some of their key assets over to China. No one knows how this event will unfold, if any when it begins.

For Korean businesses, there is an added problem in that economically they may want to relocate outside China, but political leaders in Korea may not allow the relocation.

Super easy money and generous stimulus fiscal policies adopted by many countries could also be a problem. These policies are sorely needed to stimulate the deeply troubled economy. However, there is some collateral damage following the generous policy.

Overzealous politicians allocate much more than needed, creating a future debt problem. Corporations that borrow this new money could be in trouble again, if the economy does not recover soon enough. Possible negative interest rates are intended to encourage borrowing and spending but create their own problem of hurting commercial banks.

Despite all these policies, the shape of the recession is likely to be a long L before it heads up. It is not likely a V or even a U.

Many changes outside Korea are beyond the control of Korea. Korea, however, can pursue policies that can give Korean businesses a greater chance of surviving these tough times.

Korea should freeze the legal minimum wage for five years; eliminate the 52-hour work week requirement; reverse the nuclear phase-out policy; leave location decisions on supply chains to the business community; ban labor strikes for the next five years; forget the idea of profit sharing; and establish the Coronavirus Mediation Board to handle disputes arising from the virus and reduce the social burden on lawsuits.