'More Systematic, Balanced Approach for Fiscal Sustainability'

MOSF Minister Bahk delivers a speech
at the IMF/WB Annual Meetings

Korean Minister of the Ministry of Strategy and Finance (MOSF) Bahk Jae-wan said, "Countries whose primary worry is solvency risk need to give priority to reassuring markets through more fundamental structural reforms based on determined political leadership." MOSF Minister Bahk delivered his governor's statement at the 66th Annual Meetings of the Boards of Governors of the International Monetary Fund and World Bank Group (IMF/WB), in Washington D.C. on Sept. 23. He heads a Korean delegation to the annual meetings, which run through Sept. 25.
The delegation includes the governor of the Bank of Korea and heads of commercial banks, including the Korea Development Bank, Kookmin, Woori Financial Group, Korea Eximbank, IBK, Shinhan, Hana, Nonghyup Banking & Insurance and Korea Asset Management Corp. as well as representatives of other Korean financial institutions and the financial industry.
"The challenges this time are mainly due to concerns about public finances. There is a growing call for fiscal adjustment now, but fiscal tightening all over the world can cause growth to falter again. Moreover, the already abundant liquidity makes the effect of additional monetary loosening very limited," he said.
Unlike the 2008 financial crisis, the current situation is different from country to country, said Minister Bahk, adding that the current situation is "a crisis of confidence" regarding collective will and governments' capacity to deal with ongoing problems.
As to policy suggestions to tackle the challenges facing the global economy, he said, "First, a more aggressive, systematic and balanced approach is needed to ensure fiscal sustainability. "I believe what is required now is to gain the market's confidence in our capability to restore fiscal sustainability. Rather than short-term fiscal consolidation plans, we need credible mid- and long-term ones that can balance short-term risks to growth and fiscal sustainability," he said. "Besides, in terms of how to do the fiscal tightening, we must find various measures that can also shore up economic growth."
The MOSF minister continued, "Second, we must prevent the spread of the debt crisis from advanced economies to emerging economies that could otherwise pose a systemic risk to the global economy.
"In that sense, countries with a large-sized economy should take into account how their fiscal and monetary policy would affect stability in other countries. As regards this issue, it is very timely and meaningful that the IMF attempts to strengthen its surveillance through spill-over reports considering the interconnectedness between countries and between sectors.
"Emerging economies, for their part, need to step up efforts to mitigate excessive capital flows with strengthened monitoring on capital movements, and the introduction of various macro-prudential measures. "Financial safety nets should also be established in parallel at the global level to absorb potential external shocks sufficiently."
Lastly, he called for the international community to provide continuing support to low-income countries, which are especially vulnerable to the economic crisis.
Regarding South Korea's policy response, he said Korea has being employing policy tools to curb capital volatility such as the Macro-prudential Stability Levy. "In an attempt to secure fiscal sustainability, we aim to achieve a balanced budget by 2013 through such means as diversifying the tax base, increasing the effectiveness of expenditures, and improving the fiscal management system. "Meanwhile, under the stance of fiscal soundness, we will strengthen strategic resource allocation to expand our economic foundation of growth, including job creation, green growth and human resources development. "Building on that, we will try our best to strike a balance between ensuring fiscal consolidation and promoting economic growth.
"Lastly, what's all the more important is that Korea's efforts will remain focused on supporting low-income and underdeveloped countries even with the stance of fiscal soundness in place," he said. nw

South Korean Minister of Strategy and Finance Bahk Jae-wan shakes hands with World Bank Group President Robert B. Zoellick after signing an MOU on cooperation for pursuing green growth in developing countries on Sept. 23 in Washington, D.C. Under the deal Seoul will launch the Korea Green Growth Partnership Trust Fund and commit US$40 million to the fund over the next four years. Bahk is leading a Korean delegation to the IMF/WB Annual Meetings.

Photo on Courtesy of MOSF