Example research essay topic: Domestic Demand Korean Economy - 518 words

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Although the Korean economy has grown rapidly in recent years, while appearing to maintain sound macroeconomic fundamentals, it experienced a foreign exchange crisis at the end of 1997 in the wake of severe financial turbulence in several South-East Asian economies. Faced with the threat of a default on its external debt, Korea received a $ 57 billion rescue package led by the International Monetary Fund (IMF) at the beginning of December 2001. Despite this package, the exchange rate continued to decline, while interest rates doubled to 30 per cent by the end of the year. Although financial markets have stabilized somewhat since the beginning of the year and some of the exchange-rate overshooting has been reversed, the impact of the crisis is now being felt in the real economy. Given the loss of purchasing power and the restrictive macroeconomic policies in place, total domestic demand is projected to drop by almost 10 per cent in 2002, while inflation accelerates. Despite a large increase in net exports, total output may decline slightly.

With domestic demand expected to stabilize in 2003, economic growth is likely to resume, though at well below past rates. These developments are likely to result in a substantial current account surplus both this year and next. (Creed) The government has taken a number of steps intended to open capital markets, restructure the financial system and strengthen prudential supervision, increase labour market flexibility and encourage corporate restructuring. Additional steps to improve corporate governance practices and further open the product market are planned. Rapid and effective implementation of these measures should help to boost confidence in the Korean economy, laying the groundwork for a recovery of the exchange rate and a decline in interest rates to more normal levels. Despite the substantial costs to the budget of bank re-structuring, there also appears to be some scope for fiscal policy to play a role in counterbalancing the negative impact of the crisis. (Creed) The economy is expected to contract slightly in 2003, reflecting a sharp decline in domestic demand, particularly investment. The business sector is likely to scale back its investment plans in reaction to extraordinarily high borrowing costs, excess capacity and balance-sheet problems.

In addition, firms will attempt to limit labour costs by reducing total wages, notably through cuts in bonus and overtime payments, which account for a third of employee compensation. Employment is also projected to decline, with the unemployment rate more than doubling to around 5 1 / 2 per cent in 2003. Household disposable income will be further eroded by an acceleration of consumer prices to double-digit levels, making a sharp contraction in private consumption likely despite a fall in the saving rate. However, the collapse of domestic demand should be largely offset by a massive positive swing in the foreign balance. A significant decline in imports is projected, while the competitiveness gains of Korean firms should enable them to boost exports despite the economic crisis in South-East Asia. Consequently, at current exchange rates the current account surplus may be as large as $ 15 billion (5 per cent of GDP) in 2003. (Report 2002)

Research essay sample on Domestic Demand Korean Economy