COVID-19 Crushes Everybody’s Economy Except South Korea
South Korea seems to have succeeded in mitigating both health and economic fall out for the COVID-19 pandemic.
As the US struggles with the persistent pandemic and slow return to economic growth, South Korea seems to have found a recipe to succeed at both- if it can survive a late-term uptick in the new coronavirus cases.
According to the latest OECD projections, South Korea is looking at a more 1% GDP contraction for 2020. It’s the second-best performer among major economies after China.
In contrast, the eurozone is expected to shrink 8%, and the US could see a full-year contraction of almost 4% of its GDP.
The world is experiencing the worst economic shutdown since WW2, said Laurence Boone. Boone is the chief economist of the OECD while introducing the newest outlook.
The OECD presentation underscored that economic success went hand in hand with success in managing the pandemic.
That’s partly why South Korea escaped the relatively unscathed economically – thanks to its highly effective management of the pandemic.
Both the US and South Korea recorded their first case of the new coronavirus on the same day. Since then, South Korean cases peaked at 851 new cases daily in March, then later flattened to single digits.
In the US, the cases never really flattened until mid-July, where the peak was 74,818 confirmed infections in a single day.
According to the US. Centers for Disease Control and Prevention, and the John Hopkins University, South Korea recorded seven deaths per million people, while the US recorded nearly 600 deaths per million.
Economic Success Congruent with Managing the
Pandemic
The aggressive handling of the outbreak, causing strict national lockdown, paralyzed the entire European Economies for months. It was mostly unnecessary for South Korea, which meant less economic dislocation from shuttered factors, closed restaurants, and more.
It means South Korea contained the pandemic much better than other countries, hence less economic disruptions.
The Google mobility data shows that South Korea barely changed its regular routines following the outbreak in February, and the little change they experienced recovered in April.
The biggest factors for change were public holidays and weather, not the virus. In contrast, the worst-hit of Italy saw shop visits plummet.
How did South Korea Manage with Covid?
Further, even though South Korea wasn’t as hard hit as most countries, it quickly launched a relatively aggressive fiscal policy response. It poured close to $12.2 billion or about 0.7% of the country’s GDP into businesses and citizens’ pockets in early spring.
That wasn’t as big as Germany, which launched a stimulus package close to 4% of its GDP. But because South Korea provided support quickly, it helped keep consumption up. South Korea is continuing to provide support in loans and guarantees totaling $230 billion.
Additionally, South Korea has kept the fiscal taps open. Last week South Korea announced its 4th round of stimulus, adding $6.5 billion.
South Korean policymakers say the expansionary approach will likely continue through yo next year to address the pandemic’s lingering economic impacts.
That, too, is contrary to countries like the US, which started the year with a fiscal and monetary bang but has slowed down efforts to throw cash at the continued economic weakness.
This month, the US Congress disagreed on a fresh stimulus package after Republican lawmakers sought to trim already paltry benefits. Democrats sought more aid for the huge number of unemployed Americans.
According to Andre of OECD, the fiscal response was one key to getting domestic consumption back on track.
He added that domestic demand remained relatively stable, consumption fell in the first half of the year, but fiscal support helped the rebound.
South Korea’s fiscal policy response Carrie’s more bang compared to other places.
First, more businesses spent cash payouts, which translated to South Korea consumers spending more and saving less of their bailout checks.
Regaining Domestic Consumption
South Korea consumers spent a significant portion of the money distributed in the first three tranches of the stimulus.
In the US, most households banked much of their famous $1200 stimulus check.
Secondly, some South Korean provinces also used creative solutions to ensure the government payouts get recycled into the economy and help boost consumption.
Lee Jae-Myung, the governor of Gyeonggi province, decided to test out non-cash payments. Gyeonggi province is the most populous region in South Korea.
Each resident received about $85, which they could spend over three months. However, it came in the form of local currency that they could only spend in shops within the region rather than hoard.
According to Heo Yeung-Gil, after the governor distributed the relief, local businesses’ monthly sales shot up by 18%, and 56% of small business owners said their sales also went up. Heo Yeung-Gil is the Safety Planning Division leader in Gyeonggi province, which oversees disaster relief distribution.
He added that despite the price tag for about $850 million, he deemd the program sustainable.
The program was to boost consumption and create a more virtuous cycle of spending for the economy. In that sense, Heo said the program was worth it.
Despite South Korea’s relative success so far, it’s far from done in dealing with the virus and its effects. The country has been reporting between 100 t0 200 cases daily for over two weeks. Thus, stoking fears of a new outbreak.
South Korea restricted business activity by only allowing restaurants to serve takeout after 9 pm and making cafes carryout only.
Moon Jae-in, the President of South Korea, said the government was walking ä tightrope between virus control and the economy”. After pressure from the local businesses, South Korea eased restrictions again, two weeks after they affected them.
South Korea May be in for More Economic Pain than Expected
Last month, the country’s central bank downgraded its full-year outlook for the economy to a contraction of 1.3%. This was a big jump from its earlier rosy estimates. The second wave of the virus in South Korea has also caused the OECD to adjust its initial assessment from a negative 0.8% to negative 1%.
In many countries, deficit hawks worry about the sustainability of oversized fiscal stimulus packages that can ameliorate short-term pain but only at the cost of long term debt accumulation.
But Lee Doowon had his reservations.
He said government subsidies helped Koreans, but the government cannot provide subsidies forever. The Korean government budget is deteriorating because of the subsidies. Lee Doowon is an economist at Yonsei University in South Korea.
South Korea is an export-oriented economy, and acute risk as the pandemic continues to depress the cross-border trade.
South Korea depends on international trade, which the pandemic has dramatically affected, especially in the export industry. The situation will even be worse in the coming several months unless the country makes a serious breakthrough.
Boone from OECD agrees with the sentiments. He says South Koreans’ rebound next year depends on the rest of the world rising out of the COVID-19 hole, and that’s out of its control.
Boone said South Korea integrated into the global economy. Therefore, the extent of rebound will either be limited or helped by the size and the magnitude of the rebound elsewhere.
