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Finance chief will leave a legacy of Choinomics

Dec 28,2015
Minister of Strategy and Finance Choi Kyung-hwan is leaving office with mixed reviews on his achievements.

While some praise his swift actions to ease unnecessary regulations and provide liquidity to the market, others say his so-called Choinomics failed to revive the economy.

As President Park Geun-hye has nominated Yoo Il-ho, a two-term lawmaker of the ruling Saenuri Party and former land minister, Choi will soon return to Yeouido, the home to lawmakers, and focus on the general election slated for April.

Choi, the three-term lawmaker and one of the closest allies to President Park, has led the second economic team of the Park administration since July 2014. For the past 18 months, he concentrated on stimulating the
domestic economy mostly by loosening regulations.

When he first came up with a massive 41 trillion won ($35 billion) fiscal package right after his inauguration as finance minister, the policy was likened to Japan’s Abenomics that poured liquidity into the market.

Dubbed “Choinomics,” the stimulus plan captured global attention. Choi emphasized that failure to overcome the current economic problems might send Korea on a path similar to Japan’s lost two decades. When the Bank of Korea cut the benchmark rate in August 2014 by 0.25 percentage points, it was even called “Choi’s cut.”

Fast passage of the fiscal package was one of his major accomplishments. Since Choi is a three-term lawmaker, his policies were fully supported by the ruling party.

The early expansionary plan, along with the central bank’s timely cut, is considered successful by experts and analysts.

“After Choi’s inauguration, the authority’s policy making momentum has been stronger,” said Ohn Ki-un,
)an economics professor at Soongsil University.

“The government’s willingness shows that it has accurately read the market. It was clearly aware that the current economic situation was dragging on and has shown strong determination to stimulate the market.”

Yoo Byung-sam, a professor at Yonsei University, said, “As Choi had political power, he showed strong leadership to steer the economy branch.”

In order to liven up the real estate market, Choi played another surprise card by loosening the debt-to-income (DTI) and loan-to-value (LTV) regulations.

Before taking up his post, Choi had criticized the former economic team’s real estate policy, saying, “The property market is like wearing short pants in a cold winter.”

The LTV was raised to 70 percent for all financial institutions, while the DTI was fixed at 60 percent for the Seoul metropolitan area, regardless of region, age or income.

Due to the easing, the aggregate number of transactions reached a record 1.1 million in November, up 21 percent from a year earlier. The previous record was 1.08 million in 2006.

Another key part of Choinomics was increasing household income. To do that, the economic team created a tax code revision plan with two primary goals - to make excess corporate cash reserves flow into households and reduce the tax burden on the middle class.

Part of the plan was to offer 10 percent and 5 percent tax breaks for small businesses and conglomerates that raise the average annual salary of workers above its median for the past three years.

This year, Choi’s focus was all on consumer sentiment. The Finance Ministry earmarked an 11 trillion won supplementary budget this year to overcome the severely contracted consumption due to the Middle East respiratory syndrome outbreak in May.

To encourage consumers to spend, the government encouraged retailers to get involved in big sale events at an unprecedented level. The government promoted the events as Korea’s Black Friday, comparable to the U.S. event.

Because of the efforts, the country’s GDP growth emerged from near-zero percent to hit 1.3 percent in the third quarter this year. Retail sales also grew 1.1 percent as of September. In October, sales jumped 3.1 percent from a year earlier.

“The best achievement of the deputy prime minister is overcoming the MERS outbreak,” a senior Finance Ministry official said. “Choi made sincere efforts to assure the public by showing that it is safe to go shopping and eat out to boost consumption.”

However, critics say the growth isn’t enough compared to how much Choi spent and the eased financial regulations to address household debt.

Overall, the Korean economy fell short of 3 percent growth this year. The Korea Development Institute forecasts 2.6 percent growth by the end of December. Consumer prices would rise 0.7 percent, down from 1.3 percent in 2014. Exports fell for the 11th consecutive month as of November.

Due to the eased LTV and DTI ratios, the aggregate household debt is expected to surpass 1,200 trillion won soon.

“Because the minister overly focused on boosting consumption, he missed out broader economic trends,” said Pyo Hak-gil, emeritus professor at Seoul National University.

“By stirring the property market, not the overall real economy, his policy increased risks.”

“His plan to raise household incomes was a good idea, but his term was too short to show tangible achievements,” said Cho Dong-geun, professor at Myongji University.

BY SONG SU-HYUN [song.suhyun@joongang.co.kr]


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