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The Cause of Economic Crisis:

The Cause of Economic Crisis:. Empirical Evidence for Government Failure. Hag- Soo Kim Korea Economic Research Institute. Korea Economic Research Institute(KERI). Private Business Circle Think Thank Ideology: Free Market, Free Enterprise, Free Competition. KERI

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The Cause of Economic Crisis:

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  1. The Cause of Economic Crisis: Empirical Evidence for Government Failure Hag-Soo Kim Korea Economic Research Institute

  2. Korea Economic Research Institute(KERI) Private Business Circle Think Thank Ideology: Free Market, Free Enterprise, Free Competition KERI Produce Long-term and Short-term Research outputs under 3 Fs FKI Federation of Korean Industries Marketing KERI’s Research Output to National Assembly and Governments Korea Economic Reasearch Institute

  3. Brief Summary of KERI’s Activity after the Economic Crisis • Research: Main Job • Growth and Employment Strategy to Overcome the Crisis(2009. 1) • “Crisis is Opportunity”: Enhancing Competitiveness of Business via R&D, FTA, Regulatory Reform, Low Corporate Tax Rate, M&A • Job Creation Campaign by increasing Flexibility of Labor • Seminar Open to Public and Bureaucrats Korea Economic Reasearch Institute

  4. Brief Summary of KERI’s Activity after the Economic Crisis • 1. Research: Main Job • The Cause of Economic Crisis: Government Failure (2009. 10 ) • Losing Free Market: More Regulations and Lager Governments • Need to Find some Evidence for Government Failure causing the Economic Crisis: “Not Market Failure But Hampered Market Failure by Government Intervention” • Preparing for an International Conference on Oct. 27. Korea Economic Reasearch Institute

  5. Brief Summary of KERI’s Activity after the Economic Crisis • 2. Opinion Leading: Based on Our Main Research Results • Posting Columns in Daily Newspapers • Circulation KERI Webzine via E-mail to our Members • Scholarly Activity in Korean Academic Society Korea Economic Reasearch Institute

  6. Brief Summary of KERI’s Activity after the Economic Crisis • 3. Education • To Correct the Prevailing Sentiment against Business and the Rich • Educate Various Opinion Groups: Police Officers, Lawyer, • PDs from Mass-Media, School Teachers, Young Leaders • (Selected University Students) • Free Market Economy may not be the Perfect but the Best. Korea Economic Reasearch Institute

  7. About The International Conference to be Held on Oct. 27 • 4. Topics of Presentation • The Cause of Economic Crisis: Government Failure • The Economics of Securitization and the Current Economic Crisis • by Dr. Gertchev (EU, Financial Sector Analyst) • Asset Prices and Monetary Policy by Dr. Zimmermann • (Landesbank, Germany) • Exit Strategy and Further Policy Implications by Prof. Ahn • (Dean of Graduate School, Kyunghee Univ.) • 100 minutes Panel Discussion : 3 Austrians vs. 3 Keynesians • (Directors from Bank of Korea and Minister of Finance and Strategy) • Our Lonely Voices will be Loud and Clear on Oct. 27 Korea Economic Reasearch Institute

  8. Austrian Business Cycle Theory Interest ↓ or Money supply ↑ Government Artificial Boom Mal - Investment Over Consumption Unsustainable Bust More Volatility in Investment than Consumption Korea Economic Reasearch Institute

  9. DATA For Industrial Level Analysis Check the bust process after the year 2007 using stock price index US 63 industrial investment (stock price) period (1991 ~ 2007) 2 types of assets (equipments, structures) Korea Economic Reasearch Institute

  10. Evidence from Industrial Investment Data • Three Basic Patterns of Investment Trends • Over Investment in Higher Order Production Industries during Artificial Boom and Sharp Decrease during the Following Bust • Over Investment in some industries producing Consumption Goods during Boom and Drastic Decrease in the Following Bust • Over Investment in some industries taking advantage of Lowered Interest rates, which might be the cause of the Following Business Cycle Korea Economic Reasearch Institute

  11. Evidence from Industrial Investment Data(cont’d) • Examples of the First Pattern • Increase until 2000 and then Decrease until 2003 • Pipeline Transportation (p.a.) • Equipments: 12.1% (91~95), 5.3%(95~00), -20.8%(00~03) • Structures : 14.5% (91~95), 17.1%(95~00), -1.8%(00~03) • - Machinery(p.a.) • Equipments: 14.2% (91~95), 15.3%(95~00), -10.8%(00~03) • Structures : 17.7% (91~95), 2.0%(95~00), -24.0%(00~03) • Computer & Electronic Products, Electrical Equipments/ Appliances & Components, Air Transportation, Oil & Gas Extraction, etc. Korea Economic Reasearch Institute

  12. Evidence from Industrial Investment Data(cont’d) • Examples of the First Pattern (cont’d) • Increase over 2003~2007 and then Decrease in 2008 • (stock price) • Pipeline Transportation (p.a.) • Equipments(34.6% ), Structures(11.4%), ‘08 SPI(-4.7%p.m.) • Support Activities for Mining (p.a.) • Equipments(30.5% ), Structures(27.6%), ‘08 SPI(-5.1%p.m.) • Petroleum & Coal products, Primary Metals, Oil & Gas Extraction, Machinery, Mining except Oil & Gas, Woods Products, Funds/ Trusts & Other Financial Vehicles, etc Korea Economic Reasearch Institute

  13. (Unit: %) Evidence from Industrial Investment Data(cont’d) • 2. Examples of the Second Pattern • Increase until 2000 and then Decrease until 2003 • Apparel/Leather & Allied Products(p.a.) • Equipments: 16.8% (91~95), 1.8%(95~00), -18.0%(00~03) • Structures: 3.2% (91~95), 13.1%(95~00), -23.1%(00~03) • Amusement/Gambling & Recreation Industries(p.a.) • Equipments: 16.1% (91~95), 15.4%(95~00), -3.4%(00~03) • Structures: 21.4% (91~95), 19.0%(95~00), -28.6%(00~03) • Furniture & related Products, Other Services, Wholesale Trade, Rental/Leasing Services, etc. Korea Economic Reasearch Institute

  14. Evidence from Industrial Investment Data(cont’d) • 2. Examples of the Second Pattern(cont’d) • Increase over 2003~2007 and then Decrease in 2008 • (stock price) • Accommodation (p.a.) • Equipments(11.0% ), Structures(36.2%), ‘08 SPI(-9.7%p.m.) • Wholesale Trades(p.a.) • Equipments(11.3% ), Structures(10.5%), ‘08 SPI(-2.1%p.m.) • Amusement/Gambling & Recreation Industries, Real Estate, Performing Arts/Spectator Sports/Museums & related, Motion Pictures & Sound Recording Industries, etc Korea Economic Reasearch Institute

  15. Evidence from Industrial Investment Data(cont’d) • 3. Examples of the Third Pattern • No Significant Changes until 2000(or 1995), Start to increase Investment over 2000~2003(or 1995~2000), Keep Increasing until 2007 and then Decrease in 2008(stock price) • Petroleum & Coal Products • Equipments (p.a.) : 7.0% (91~95), -5.9%(95~00), • 11.9%(00~03), 12.3%(03~07) • Structures (p.a.) : 5.4% (91~95), -4.6%(95~00), • 10.9%(00~03), 5.4%(03~07) • Stock Price Index(p.m) : -1.07% in 2008 , -1.5% in 2009 Korea Economic Reasearch Institute

  16. Evidence from Industrial Investment Data(cont’d) • 3. Examples of the Third Pattern(cont’d) • Accommodation • Equipments (p.a.) : -2.2% (91~95), 3.6%(95~00), • 9.2%(00~03), 11.0%(03~07) • Structures (p.a.) : 2.2% (91~95), -3.2%(95~00), • -23.9%(00~03), 36.2%(03~07) • Stock Price Index(p.m) : -9.7% in 2008, 3.4% in 2009 • Real Estate • Equipments (p.a.) : -9.0% (91~95), 14.0%(95~00), • 10.7%(00~03), 4.4%(03~07) • Structures (p.a.) : -6.0% (91~95), 4.5%(95~00), • -20.9%(00~03), 13.1%(03~07) • Stock Price Index(p.m) : -11.1% in 2008, 0.06% in 2009 Korea Economic Reasearch Institute

  17. Evidence from Macro Data; Using a VECM PFI : private fixed investment PC : private consumption CTS : cumulative term spread Z : short-run error correction term Korea Economic Reasearch Institute

  18. VECM Estimation Results : 1954 (Q3) ~ 2009 (Q2) Korea Economic Reasearch Institute

  19. VECM Estimation Results : 1954 (Q3) ~ 2009 (Q2) Cointegrate PFI PC CTS Cointegrate PFI 0.87% ↑ CTS 1% ↑ PC 0.74% ↑ Korea Economic Reasearch Institute

  20. VECM Estimation Results : 1954 (Q3) ~ 2009 (Q2) Short – run Disequilibrium at t-1 Reduce Investment at t Korea Economic Reasearch Institute

  21. Response Function of lnPFI to lnCTS Interest rate ↓ Spread ↑ Investment ↑ (until t+8Q) Increasing rate ↓ Korea Economic Reasearch Institute

  22. Response function of lnPC to lnCTS Interest rate ↓ Spread ↑ Consumption ↑ (until t+10Q) Increasing rate ↓ Korea Economic Reasearch Institute

  23. VECM Estimation Results : 1954 (Q3) ~ 2009 (Q2) Response of lnPFI Response of lnPC Korea Economic Reasearch Institute

  24. Thank you Korea Economic Reasearch Institute

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