IMF Urges Seoul to Boost Domestic Demand

The International Monetary Fund (IMF) said Thursday that Korea and other Asian economies should increase the size of their domestic markets to achieve sustainable growth in the face of prolonged demand contraction in the United States and other advanced countries.

It urged individual nations in the region to bolster domestic demand through greater foreign exchange rate flexibility and structural reform to improve the global imbalance.

Anoop Singh, director-general of the IMF's Asia-Pacific department, said at an economic outlook forum in Seoul that Asia is rebounding rapidly from the depth of the global crisis, adding the growth for the entire region is forecast to increase to 5.8 percent in 2010 from 2.8 percent in 2009, both higher than previously projected.

In early October, the Washington-based organization raised its outlook for Korea, saying Asia's fourth-largest economy will contract 1 percent this year from 2008, up from its earlier forecast of a 3-percent decline made in July. It also revised the nation's 2010 growth projection to 3.6 percent from the previous 2.5 percent, saying South Korea will benefit significantly from the upcoming global economic recovery.

``The primary driver of Asia's recovery has been a progressive return toward normalcy following the abrupt collapse in global trade and finance at the end of 2008. Just as the U.S. downturn triggered an outsized fall in Asia's GDP because international trade and finance froze, now their normalization is generating an outsized Asian upturn,'' Singh said, adding Asia's fortunes remain closely tied to that of the global economy.

The other key driver of Asia's recovery has been the region's rapid and forceful policy response, the IMF official said. ``It was made possible by Asia's strong initial conditions. Fiscal positions were sounder, monetary policies more credible and corporate and bank balance sheets sturdier than in the past. These conditions have given policymakers the space to cut interest rates sharply and adopt large fiscal packages, helping to sustain overall domestic demand.''

He then said that even though Asian economies are rapidly rebounding on the back of state-led stimulus measures, it remains unclear whether the recovery has gained enough momentum to ensure sustainable growth.

``In the near term, they will need to manage a well-integrated balancing act, providing support to the economy until the recovery is sufficiently robust and self-sustaining, while ensuring that the support does not ignite inflationary pressures or concerns over fiscal sustainability,'' Singh said.

He said over the medium term, policymakers will need to find new momentum to return to sustained, rapid growth in a new global environment of likely softer G7 demand. ``Asia's longer-term growth prospects may be determined by its ability to recalibrate the drivers of growth to allow domestic sources to play a more dynamic role. This rebalancing will require greater exchange rate flexibility and structural reforms that will allow for a smooth reallocation of resources across the economy.''