[The Editors' Verdict] Unknown Uncertainties

Professor Kim Kyungsoo, Department of Economics, Sungkyunkwan University

Last week, The Economist published a poignant story about a couple of migrant workers in their 50s working in Beijing, China, who visited their hometown for the Lunar New Year but were trapped due to the lockdown caused by the novel coronavirus (COVID-19). They traveled 2,000 km to their hometown, but the nearby area where their son and daughter-in-law work was also locked down, so they could not meet. What made it difficult for them was not the confinement itself, as they had never really had the chance to explore Beijing properly anyway. Their main concern was that they could no longer work. The Economist reported that a significant number of the 173 million long-distance migrant workers are unable to return to their workplaces.

The South China Morning Post (SCMP) reported that Chinese livestock farmers are suffering a double hardship due to regional travel bans imposed as a quarantine measure: they are not receiving feed supplies on time, and many markets are closed, preventing them from selling their livestock. Recently, the Chinese government exempted tariffs on U.S.-imported agricultural products. However, the logistics system is not functioning smoothly, so this has not been very helpful. Following a sharp rise in meat prices last year due to African Swine Fever (ASF) cutting supply in half, the country is now struggling with agricultural inflation caused by disruptions in the food supply chain.

Although production activities have resumed mainly in large corporations two weeks ago, a considerable number of nearly 300 million migrant workers have yet to return to their workplaces. Even when migrant workers return, they must undergo individual quarantine for two weeks, which imposes enormous costs on small and medium-sized enterprises. Fortunately, even if normalization occurs, there are few places to sell the produced goods because markets and shops nationwide remain widely closed. Although e-commerce has become more active, there is a shortage of personnel responsible for freight transportation services, and passing through checkpoints across the country smoothly is not easy.

Forbes predicted, based on the search index of Baidu, a Chinese multinational technology company, that the negative ripple effects of COVID-19 on the Chinese economy will be greater than those of the U.S.-China trade war. This is because the pandemic, which has spread nationwide, disrupts not only the food supply chain but also the manufacturing supply chain.

Looking outside China, East Asia?including South Korea, Taiwan, Japan, and Singapore?is expected to suffer significant damage from COVID-19 due to declining exports. Credit rating agency S&P forecasted that Hong Kong and Singapore would be hit the hardest, with Australia, Taiwan, Thailand, and Vietnam also facing difficulties. South Korea is predicted to be vulnerable to supply chain disruptions. If this situation continues into the second quarter, many East Asian countries are expected to fall into recession.

One hundred years ago, economist Frank Knight distinguished between Risk and Uncertainty. Former U.S. Secretary of Defense Donald Rumsfeld further categorized these as 'Known unknowns' and 'Unknown unknowns.' Unknown unknowns are much more dangerous because they are impossible to prepare for.

Currently, we are experiencing the uncertainty of a globally interconnected economy both domestically and internationally. The concern is that South Korea may suffer significant damage from this uncertainty due to its high dependence on China for both export demand and supply chains. The number of confirmed COVID-19 cases has surged sharply within a week. The government must focus all its capabilities to maintain public trust that it will overcome this outbreak. Otherwise, we may once again face unknown unknowns.

Kim Kyung-soo, Professor Emeritus, Sungkyunkwan University