[Inside Chodong] The Korean Economy Receives the Martial Law Bill... How Can It Be Revived?

At Least Tens of Trillions of Won Lost Due to Political Turmoil
Bipartisan Cooperation Needed to Revive the Economy

Changhwan Lee, Deputy Head of the Economic and Financial Department

How much damage has the political turmoil following the December 3 emergency martial law incident inflicted on our economy? The tangible and intangible losses are estimated to amount to at least tens of trillions of won.

First, the martial law incident caused the value of the Korean won to plummet in real time. On the night of the martial law declaration alone, the won-dollar exchange rate surged by about 40 won intraday. Such a depreciation of the won, comparable to what might be experienced during a global economic crisis like the 2008 financial crisis, occurred due to domestic political issues. According to the Bank of Korea, the won-dollar exchange rate rose 5.3% over one month, from 1,394.7 won at the end of November last year to 1,472.5 won at the end of December. Among major world currencies, this was the largest increase except for Russia (6.4%), which is at war.

The sharp rise in the exchange rate depleted the government’s foreign exchange reserves and eventually forced the mobilization of the National Pension Service. The National Pension is not government money but the hard-earned retirement funds we contribute monthly. Due to martial law, we are now facing a situation where even our retirement savings could be adversely affected.

The martial law also attacked the stock market. From December 4, the day after the martial law incident, until the end of December when political turmoil peaked, foreign investors net sold 1.9 trillion won worth of shares on the KOSPI. The KOSPI plunged to new lows. Foreign investors sold over 18 trillion won in government bond futures in December. Although the recent passage of the presidential impeachment motion in the National Assembly has somewhat lifted the mood, it is still difficult to talk about a full recovery.

The third impact was on consumption. Consumer sentiment, already weakened by the sluggish economy, plummeted after the martial law incident. The Consumer Confidence Index (CCSI) released by the Bank of Korea for December was 88.4, down 12.3 points from the previous month. This is the largest drop since March 2020 (18.3 points) during the COVID-19 crisis. Year-end events such as year-end parties and travel were largely canceled after the martial law incident, and dining out and outings decreased, pushing the self-employed business conditions to historically worst levels.

Election costs due to the possibility of an early presidential election and the potential rise in consumer prices caused by the exchange rate surge are also considered economic costs triggered by political turmoil.

How should the economic deterioration triggered by the martial law incident be addressed? Recently interviewed domestic economic scholars emphasized that bipartisan political cooperation is paramount to revive the economy, and they also suggested the necessity of proactive expansionary fiscal policies such as the Bank of Korea lowering the base interest rate and the formulation of supplementary budgets.

Kim Hong-ki, president of the Korean Economic Association, stressed, "The economic damage caused by political turmoil is too great," and added, "At least on economic issues, a bipartisan consultative body involving the ruling party, opposition, and government should be formed to respond cooperatively." This aligns with the view of Lee Chang-yong, governor of the Bank of Korea, who argues that South Korea’s economy must demonstrate to the international community that it operates normally and independently of politics to restore trust.

Lowering interest rates and government expansionary fiscal policies are also necessary. Kim Jeong-sik, emeritus professor of economics at Yonsei University, argued, "The Bank of Korea should further lower the base interest rate to rekindle the spark of economic recovery." Kwak No-seon, president of the Korean Finance Association, advised, "It is necessary to stimulate private consumption through proactive fiscal roles such as supplementary budgets in the first half of the year."

The scholars also expressed concern that there is not much time left to save our economy. Considering the collapse of the working-age population due to rapid aging, declining potential growth rates, and rapidly changing international circumstances, they warned that our economy could deteriorate even faster. When it comes to economic issues, political conflicts must be set aside, and heads must be brought together as soon as possible.