The Korean economy is stressed out. Growth is slowing, inflation is on the rise, Korea’s foreign currency reserves are shrinking and the BOK’s bonds are maturing with not enough buyers in sight. So, what does President Lee Myung-bak have to say? LMB in his radio address yesterday asked the Korean people to shoulder more of the burden!
Per Reuters:
“If we cut down on energy by 10 percent, we will not post a current account deficit. And, please, cut overseas consumption and increase domestic spending,” Lee said in a prepared statement for his first radio speech to the nation.
Theoretically, what LMB says is true, but why must the average Joe bear the disproportionate burden? It’s not just the free spending Korean tourist or the formula one race inspired taxi driving style that needs to be called out, but it’s also big Korean companies that deserve to share some of the blame.
In other economic news, here is a shout-out to one of my favorite economists (and amateur George Clooney look-a-like), Paul Krugman, who won the Nobel prize for economics yesterday. Congratulations Paul! You may or may not have been the first to predict the East Asian Economic Crisis, and I may not agree with all your political views, but you are very good at your day job. Please stick to it!
{ 24 comments… read them below or add one }
the conservative marmots hole liking paul krugman’s winning the nobel prize.
about as shocking as when Appalachian State beat M*ch*gan in football last year
I cant believe it. Andy and Brendon, what say you on this one?
I will say this the man is an absolute genius when it comes to int trade, he took ricardo’s theories and turned them on its ear and he was right.
I am split on the Krugman selection. His work was a long time ago, why was Huriwitz and Meyerson more deserving last year than Krugman? Then again it took over 50 years to recognize Nash
Meanwhile his writing over the past few years is shockingly in line with selections like Carter and Kofi and the UN players for the peace prize.
On the otherhand, at least it stops that gasbag Jeffrey Sachs from getting his mug on the front page again.
Clooney lookalike? Clearly you haven’t seen Krugman’s gut, or the chin he’s hiding behind that beard.
You’re all over the map, why aren’t ya consistent? Americans should bail out Wall Street/the big wig banker folk but “the average Korean shouldn’t bear the disproportionate burden(of saving gasoline/buying Korean products),” Not even for a while?
@4 Hey I am with you man. My first reaction was let ‘em fail. And frankly still is. For better or worse the bailout got passed with little national consensus.
However it may put Korea in a pit of a spot. How are they going to finance their imports with no credit markets? Or how are was Samsung going to do what it did today and borrow to bid for SanDisk?
Speaking of asymmetrical actions. I wonder what the Korean reaction would be to the US President talking on radio of the need to buy more US made products over imports. Talking on how unpatriotic it would be to buy that Hyundai SantaFe or Samsung mobile phone.
Er Rob, out of curiosity how did the system move me from Korea to Australia so fast when I never got on a plane?
Going back to Krugman, is he a genius who foresaw all the dangers, or is he the one who cried fire causing a stampede?
Take the case of Iceland for instance. This was in the Businessweek, where it mentions self fulfilling prophesies, where it’s not necessarily always the economic fundlementals, but the perception that counts most:
“In 2006, after a currency crisis that hammered the krona, some analysts raised concerns about the high level of leverage in the Icelandic banking system. But many eminent economists and commentators were quick to rush to the country’s defense. They noted that Iceland had strong financial regulators, a sound economic environment with low unemployment, and a fully funded pension system. While the country had a large current account deficit, they said, comparing it to emerging economies such as Thailand or Turkey was misguided.
But as Frederic S. Mishkin, a professor at Columbia University and a former economist with the Federal Reserve, noted in a 2006 report titled Financial Stability in Iceland, “If a significant fraction of traders in international financial markets think that Iceland will be undergoing financial meltdown—even if fundamentals don’t warrant it—they could create a self-fulfilling prophecy by massively pulling out of Icelandic assets.” Mishkin’s prophecy just came true. “
Krugman’s no economist. He traded scholarship for partisanship long ago. Wait till he’s given a little power under an Obama regime: we’re set for the Great depression all over again.
“we’re set for the Great depression all over again”
Set? America’s already there.
buy a Hyundai.
Overseas Korean, seal your lips, unless you are a Hyundai owner.
Re-instate Mins0306.
new york tom in the news !
http://www.seoul.co.kr/news/cartoon.php?mode=cartoon&kind=bmh&year=2008&month=10&day=11
# 3,
What about Clooney in Syriana?
http://www.robertmcnickle.com/photos/uncategorized/gc1_1.jpg
# 4,
I’m all over the map? I prefer the fact that I’m open minded to more “hybrid” solutions.
wjk,
Have you looked at the parking lot of your local KA church lately? Lots of Hyundais.
My neighbors are Korean and they have a Sonata and a Veracruz in their garage. As their Toyotas and Hondas that they bought in the late 90′s and early 2000′s wear out, more KAs are in fact looking at replacing them with Hyundais. Keep in mind, it’s been less than 5 years that Hyundais have finally started to make descent cars…
Say, I think their Genesis sedan is a pretty nice car and I’d consider one in about two years if they come up with a model that looks like a Lexus GS 460. The Genesis sedan right now is too ajussi looking for me.
Regarding Mins0306. I believe his absense (or lack of participation) from the MH is voluntary.
http://www.rjkoehler.com/2008/02/06/going-on-vacation/
Two points:
1. This entry was written by “Wangkon936,” not Robert. And I am not sure if we have enough evidence to peg “Wangkon936″ as a political conservative.
So his praise for Krugman may not be out of character.
2. It’s been more than a decade since I have read and written about Krugman’s controversial Foreign Affairs article “Myth of Asian Miracle” (or something like that), but I am not sure if Krugman deserve so much plaudits for his oracular prescience regarding the IMF crisis.
To begin with, as many economists have pointed out, Krugman’s predictions were based on extremely outdated (and some would argue outright faulty) productivity data by Alwyn Young that was borderline irrelevant to his argument. Perhaps more important, Krugman later conceded himself that a) his predictions envisaged a slowdown decades into the future and not an implosion the next few years, and b) the transpiration of the IMF crisis did not involve the causation factors he outlined in the Foreign Affairs article.
In fact, to be brutally frank, my recollection of the essay was that it screamed of a hack job by someone who did not know much about East Asia. This is, of course, not to say that Krugman is not a great economist (though I have no expertise to determine the veracity of that claim). But it is also characteristic of academic stars today to opine about things that are completely outside of their academic purview or domain of expertise. And Krugman’s essay at the time reminded me of Brecht’s tart question to Einstein: I do not talk about physics; why do you constantly prattle about politics?
P.S. I agree with those who have voiced that Krguman has abandoned any veneer of scholarly objectivity in favor of transparent partisanship in his role as an NYT columnist. And perhaps his infamous Foreign Affairs article was a sign of things to come on that score.
# 14,
I’d like to keep my political affiliation personal for the time being. In terms of some disclosure, I will say that I’m a registered Republican, but that has more to do with my tax bracket and less to do with my personal beliefs. I will say that people are WAY too interested in putting other people in certain ideological “camps” and I just don’t see myself as being that “fixed” on a defined position. I’m a problem solver not a lobbyist. I think the best solution to a problem is one that requires the cooperation of a diverse group of people and flexible set of ideas to address. But then that’s just me.
Regarding Krugman’s so called “predicting” the East Asian Economic Crisis of 1997-1998. By Krugman’s own assertion, he didn’t predict it per say. Krugman himself said he was 100% wrong, but that everyone else was 150% wrong. What Krugman said in his landmark 1994 article, “The Myth of Asia’s Miracle” was that East Asia, despite it’s fantastic 8-10% a year growth rates, will hit a wall and their aggressive growth rates will decline to what more developed Western countries will experience as they themselves become more developed.
Back in 1994, there were a group of pundits, namely Chalmers Johnson (author of “MITI and the Japanese Miracle”) and James Fallows (then editor of U.S. News and World Reports) who said that that East Asia, by virtue of their high growth rates, had somehow “discovered” a new and more superior form of capitalism that was better than established Western models. In other words, East Asia had somehow mysteriously discovered ways to circumvent established neo-classical economic theories.
Krugman was the first one to say, emphatically, no. He staked his reputation on it at a time when no one else really was. It is true that Krugman piggybacked off a paper by a Singaporean grad student. But that paper would of ended up as a forgotten dusty academic tome if Krugman hadn’t of recognized its potential and used it as a basis for his 1994 article. Unlike a lot of Korean professors, Krugman does give credit where credit is due and he did add quite a bit to the original premise that does qualify the idea of being enough to call his own. Additionally, he took highly esoteric and academic economic concepts and put it into layman’s terms for informed non-economists.
The essence of Krugman’s argument was that Asian countries had not discovered a new and mysterious and more effective way to grow. They were growing simply because they were moving people out of the farms and into the factories and once they attained a level of development commensurate with a developed European or North American country, their grow rates would slow to something more comparable. The key to his argument was Total Factor Productivity (“TFP”). Yes, fast growing Asian nations were growing quickly, but was their productivity increasing? Were they developing better technologies and tools to make better use of the resources they had on hand? Or… where they just throwing people at the problem? Asian nations were not growing by building better mouse traps, but they were growing by building the same mouse trap more cheaply and more quickly than others. This being the case, there would be a saturization point, where all the people from the farms that can be moved to the factories ends and labor becomes scarcer, prices rise and overall grow would slow. Thus, the so called East Asian economic “Tigers” would not experience 8-10% growth rates indefinitely, but would have to follow the same economic principles that everyone else had to. Asia may one day have the largest economies in the world, but not because they knew more about growth than others, but simply because Asia, as a part of the world, had more people in it.
In hindsight, this may not seem like a revolutionary idea, but circa 1994 he was the only one actively expounding it and staking his reputation on it. All kinds of people came of the wood work to criticize him but one of the main knocks against Paul was the old “he didn’t know enough about Asia” argument that the Chalmers Johnsons of the world liked to come from. Paul didn’t have enough of the on-the-ground experience, he hadn’t talked to the bureaucrats, he didn’t know enough about each Tiger economy’s “brilliant” growth strategy, so on and so forth.
By 1996-97, it turns out what Paul said about these East Asian countries turned out to be true. Thailand, Indonesia and South Korea were in fact reaching that saturization point and their growth rates were under stress. Sure, they tried to hide it by overinvesting in commercial property (Thailand), overleveraging banks (Indonesia) and overleveraging companies (Korea) and they pegged their currencies to the dollar. Currency speculators, such as George Soros, obviously agreed with Krugman (whether they were familiar with his article or now) and placed their bets against each of these countries regarding the sustainability of their growth rates. In a brutal sort of way, the currency speculators proved to be right.
So again, Paul Krugman didn’t predict the East Asian Economic Crisis. I never said he did. Nor did he. However, he predicted that the East Asian economies face the same economic rules as everyone else and that their high growth rates were not perpetual. This he was absolutely, positively, 150% right on and he got A LOT of flak for his, but he never changed his viewpoint and in 1998 all his critics were silenced and he was rightly vindicated.
Will China ever run out of workers? Will they grow forever? If not, at what point is this plateau?
WangKon936,
That was a very thoughtful, comprehensive reply. Let me (try to) offer a brief(er) response.
1. I was not singling you out per se in my criticism of those who blindly tout Krugman’s supposed Delphic achievements. In fact, your original post was very noncommittal on this issue. Nonetheless, it is useful that you do clarify your own position and more explicitly acknowledge that Krugman played a more limited role than the typical media portrayal of him as the Cassandra of the IMF Crisis.
2. I am familiar with both Johnson’s and Fallows’ writings, and I have also read the more specialized or scholarly presentation of their arguments, e.g. the writings of Wade, Haggard, et al. Yet, I do not think Johnson’s and Fallows’ writings (perhaps Vogel is even more egregious and a fit target of your criticism), as hyper-optimistic they were at times of East Asia’s future economic trajectory, were completely off the mark as you seem to imply.
To begin with the pragmatic, prescriptive side: While the “developmental capitalist” model may have now been proven to lack permanence, it still did its job well. I am sure you are familiar with the dismal prognostications for growth that various US and global agencies pronounced on East Asia before its takeoff. What occurred as a result of the application of the model could not have been predicted by even the most optimistic scenarios, with full implementations of neo-classical policies. (As David Kang, my old college professor used to emphasize in class ad infinitum: “The argument that East Asia could have grown faster if it implemented neo-classical policies makes no sense, given that no other region has grown as quickly in human history.”)
Next, on the scholarly, descriptive side: The “developmental capitalist” model certainly better explains what happened in East Asia than its alternatives. I know that a number of distinguished neo-classical economists (e.g. Milton Friedman, the authors of the World Bank’s famous report to some degree) have actually tried to transmogrify East Asian growth as a straightforward case of following neo-classical principles, and that alternative description seems to me lacking all grounding in actual facts. So Johnson, et al. was at least partially right to fling “he didn’t know much about Asia” argument you pillory against his antagonists.
Now, let me qualify my own views, though a full-blown presentation is impossible and unwise in this space. I am not disagreeing with you that the presumption of infinite or indefinite double digit growth envisaged by some over-zealous champions of the “developmental capitalist” model was silly. But I will also not go the other extreme of saying that the “Asian values” rhetoric was all bunk. My view is closer to that of Fukuyama, who seems to think that the “developmental capitalist” model works best for developing economies, under the right circumstances (that is, less predatory leadership).
3. Relatedly, I am not sure if I agree with you Krugman was the lonely maverick against the consensus that Johnson, et al. forged. The “developmental capitalist” model was extremely controversial within the disciplines of both international economics and East Asia regional studies, and there were plenty who inveighed against it—though most of the academic critics sought to shift the terms of the debate by trying to present the “East Asian miracle” as an unproblematic success story on the basis of the application of neo-classical principles.
4. I think you misunderstood the aim of my reference to Krugman’s reliance on Alwyn Young’s data. I did not mean to imply that Krugman plagiarized. Instead, my point is that Krugman relied on data that was extremely controversial, given that it was outdated (Young seems to have cherry-picked his years), as well as perhaps defective in its calculation (so said Young’s critics; I cannot be sure, given I am a political theorist by training, and my background is emphatically not in mathematical economics).
5. You disclaim the view that Krugman correctly predicted the IMF Crisis, but then you add that Krguman was vindicated by the IMF Crisis. Isn’t this saying the same thing pretty much?
Again, I don’t want to open a huge can of worms and re-fight this old battle, but I tend to think that the gyrations of the international finance markets—and Kim Young Sam’s thoughtless, precipitous opening of South Korea’s money markets—has just as much to do with the IMF Crisis in the Korean context as corruption or declining productivity.
6. I agree that Krugman is a good writer, and this talent enables him to translate difficult, abstruse concepts into everyday jargon. That’s about the only unambiguous praise I will ever heap upon Krugman. But this is not necessarily a good thing, because some complex concepts cannot be translated into everyday understanding, and the attempt to do so would only water-down and outright distort such concepts.
P.S. I share your distaste for ideology-labeling. Generalizations and labels have their uses, but they can seriously distort phenomena when over-used.
LMB’s big plan is that we buy Korean products only? But, doesn’t that mean that many who work for import companies will lose their jobs just like in 1998? Brilliant.
“Keep in mind, it’s been less than 5 years that Hyundais have finally started to make descent cars…”
Actually, Hyundais have been pretty good since 1999. They’ve been great since 2002.
PS. Descent cars? They have no power going uphill?
I’m starting to look for a really nice low in the Korean stock market, looking to pick up little bits and pieces maybe of stocks like LG and Samsung. That low might not come for quite a while, of course. Maybe not for a few years even. How far out in time are KOSPI options traded?
But the larger point is that if the credit elements of this crisis can be dealt with it seems to me that Korea could come out on top from all this mess. Sure, growth rates are unlikely to return to the miracle days, but the low won (which I had imagined in a post back in March could reach 1400 against the greenback) puts Korea’s export economy in a fantastic position, especially to steal market share from Japanese and other exporters. Some think that little South Korea will even become China’s <i>nuhmba one</i> source of imports. The won at 1300 or so shouldn’t be seen as a weakness until the next leg up in commodities, which could be in quite a while. As insurance, Korea needs desperately to further develop its natural gas and alternative energy projects wherever possible, hopefully teaming up with efforts going on in other countries, and to reduce its energy footprint, even as energy prices fall. A weak won can help Korea win an export rivalry and continue the export orientation of its economy — as long as the larger advanced nations can handle the crisis in credit and interbank lending — but medium term risks of commodity price spikes will remain as long as we’re using oil, and will become severe once/if economic growth and money/credit expansion coincide again. Anyway, I’m starting to turn away from the norm here and am becoming something of a Korea bull.
# 22,
No worries… the contrarian play is what made Buffet rich.
But don’t forget the price of inputs. Yes, the price of Korean labor goes down when the won craters, but the price of inputs (commodities, capital goods, components, gas, etc.) goes up…
What’s been hammering the current account balance has been the increasing price of these inputs. Additionally, what’s been hammering Korea’s short term debts have been the mass purchase of options to offer greater protection against the rising of prices of these inputs.
Won Joon Choe,
Unfortunately, I don’t have a lot of time to address your second salvo of questions, but I’ll try.
2) Fallows and Johnson were off the mark, at least what I read in Fallows “Looking at the Sun” and Johnson’s “MITI and the Japanese Miracle.” They advocated that Japan and the East Asian Tiger’s export dominated, government-lead development model were ultimately superior to Western Neoclassical models and often used highly qualitative analysis’ to argue their points. When the IMF was requiring a lot of structural changes, i.e. requiring the afflicted East Asian nations to increase transparency and deregulate, Chalmers Johnson was literally jumping up and down, foaming at the mouth, claiming that the IMF was “doing no different than destabilizing these governments just like the CIA did with Latin American countries during the Cold War…” or something like that (I’m paraphrasing here as I’m relying squarely on memory).
I also believe, like you, that East Asian values did play a very important role in helping these countries develop, but I would also argue, like Charles Wolf at the Rand Corporation, that the non-transparency and cronyism that was in part encouraged by these East Asian values were also at fault.
Every country needs an underlying value system to help efficiently mobilize capital and resources towards development. For some western countries it was the Protestant work ethic and for East Asia it was the Confucian work ethic. In my opinion, the major weakness of the Protestant work ethic is irrational optimism, that gives rise to speculative bubbles. Asia’s Confucian work ethic’s greatest weakness is cronyism, rigidity and Byzantine business / government relationships.
3. When it comes to academic papers, Krugman wasn’t a lonely maverick. There was plenty of debate between pencil pushing economists at the time, but when it comes to papers written for the intelligent, but non-economically inclined masses, Krugman was every bit the maverick. If you don’t think so, then name someone else who stuck their neck out in 1994 or earlier.
4. Alwyn Young’s data was, at the end of the day, ultimately inaccurate and wrong. However, the construct was not wrong. That construct was TPF, or Total Factor Productivity. Even Lee Kuan Yew said that although the data Krugman used was wrong, the concept of TPF was absolutely right. Productivity rather than aggressive resource allocation was more important as those easy resources began to run out.
5) Let me clarify. Krugman didn’t predict the East Asian Economic Crisis. He predicted that the East Asian countries would start to have lower growth as they ran out of people to move from the farms to the factories. It was lower growth, that these Asian nations were trying to mask with smoke and mirrors, that caused currency speculators to attack their currencies. He predicted the major cause of the crisis, but no the crisis itself.
The East Asian Economic Crisis merely exposed the fact that these nation’s grow was slowing, which did infact vindicate Krugman and his 1994 article. However, in 1994 Krugman had no idea that these nations pay for these slower grow rates with an economic crisis at the scale of what was to befall them in 97-98.
6) Krugman is probably one of the best at taking complex economic ideas and distilling them for general consumption in an interesting and readable manner. It was his writings that got me interested in macro economics in the first place. I don’t agree with everything he says, particularly when he ventures into political commentary, but when he stays closer to his economic roots, that’s when I listen the most.
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