What Caused Korea's Business Cycle to Shorten? [ SERIWorld ]

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What Caused Korea's Business Cycle to Shorten?

JUNG Hyung-Min

Oct. 24, 2006

[CEO INFO] What Caused Korea's Business Cycle to Shorten? (October 24, 2006) JUNG Hyung-Min / Research Fellow (Macroeconomy Department) Welcome to our video program. I'm Hyung-Min Jung. Today, we'll talk about Korea's shortening business cycle. The business cycle refers to a sequence of economic activity conducted over a period of time encompassing both expansion and contraction. Currently, Korea's business cycle is noticeably shorter than before. That's why Korea faces increased economic volatility regardless of improvement in economic indicators. A shortening in the business cycle can explain why domestic demand remains weak even when exports increase and employment does not improve or when manufacturing industries show robust performance. According to the National Statistical Office, Korea's economy went through six business cycles between 1972 and 1998. Each business cycle typically lasted four years: expansionary period lasted for an average of 11 quarters and recessionary periods lasted for an average of six quarters. After the 1997 financial crisis, however, the business cycle shortened to a total of two years with the average time span for expansion and contraction compressed to five and three quarters, respectively. A shortening in the business cycle has discouraged Korean companies from investing which has contributed to Korea's deteriorating economic fundamentals. It is evidenced by the fact that Korea's economy experienced three short-lived business cycles from the third quarter of 1998 to the first quarter of 2005. Now, let's take a look at the root causes for a shorter business cycle. First, the Korean government's excessive intervention has contributed to a shortening in the business cycle. In an effort to revive economic activity, the Korean government introduced a series of economic stimulus packages. These packages, however, led to unexpected results such as asset bubbles in the tech-heavy KOSDAQ market and burgeoning household debt levels. Second, a shorter business cycle is a product of heightened volatility of consumption. Previously, private consumption used to function as a buffer promoting stability in the business cycle. However, consumption's overall volatility has increased since the financial crisis. Changes in consumption patterns and job insecurity are further reasons underpinning volatility in consumption levels. Third, strong export levels no longer contribute to a virtuous cycle. In the past, robust exports used to boost investment levels, leading to an increase in employment and consumption. This cycle ceased after the 1997 financial crisis. Fourth, Korea's economy is vulnerable to external shocks because of its heavy dependence on trade and the information technology industry. Korea's exports centered on tech products have been seriously affected by the global IT industry slump. For example, the dot.com bubble in the US dealt a blow to Korea's exports. Overall, a short business cycle indicates weakening economic fundamentals and a break in the virtuous cycle between exports and domestic demand. In order to promote economic growth and restore the broken links, Korea needs to boost domestic demand. In an effort to promote domestic spending, the Korean government needs to strengthen its supervision over financial institutions. In addition, the government should reassure Korean consumers of concerns over future, childcare, unemployment and housing. Also, the government should keep in mind that its excessive intervention only caused economic difficulties and business cycles to shorten. In this regard, it needs to make efforts to strengthen Korea's economic fundamentals by easing regulations. Also, it should diversify and streamline its present industrial and economic structure which is currently vulnerable to external shocks. Thank you. Copyright 2006 Samsung Economic Research Institute. All rights reserved.

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