[INSIGHT]The irony of government spending

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[INSIGHT]The irony of government spending

A global business fluctuation is equivalent to the inundation of the Nile Valley during ancient Egyptian times, John Clark, a U.S. economics professor said in 1898. He also said this phenomenon is repeated periodically, and affects the lives of all people, no matter their origins. I believe his insight on the world made more than a 100 years ago is valid in understanding our current world.

Experts say domestic business is showing clear signs of recovery. At one stage in 1999, the Korea Composite Stock Price Index reached 1,000 points, which seemingly signaled a full recovery from the financial crisis that hit the region in 1997. But the bubble, bloated by aggressive security corporation advertisements, such as Hyundai Securities Co.'s Buy Korea Fund, which predicted rosy futures on the market and an inflow of foreign capital, burst too soon.

This time the financial situation seems different. Small and medium sized corporations are driven by work, and factories are busily operating to meet the orders. The business survey index for the second quarter scored small and midsize manufacturers nationwide at 133, up 53 points compared with the first quarter. The rise is said to be the greatest since the Korea Credit Guarantee Fund started compiling the index.

Stagnating economic growth of an advanced economy like those of OECD member countries stems from insufficient demand rather than problems in the supply sector. Demand consists of consumption, government spending, investment and exports. When Korea was under the bailout program set up by the International Monetary Fund, people were advised to spend more to revive the economy. Household debt swelled over the past years from intemperate spending, owing to the fact that the government advocated domestic consumption to resuscitate the economy and due to the low interest rates, the lowest in Korean history. Domestic spending is growing, which has even led to the government requesting banks to restrict household loans to prevent individual bankruptcies. Investment in factory facilities has just begun to revive, and people's psychology favoring investment will revive when they are convinced that Korea has passed through its recession.

The government is calling to revive regulations on the construction industry that it had withdrawn to stimulate the economy, as speculative investment in housing is showing signs of overheating. There is some good news for struggling Korean exports, including the appreciation of the yen and the recovery of the U.S. economy. Prices of semiconductors, Korea's main export item are rising, and automobile exports are taking a favorable turn, which will draw optimism toward related businesses. If consumption and investment are taking the right steps, and exports are showing a favorable tendency, then government spending will decide the fate of the Korean economy.

All types of economic control are political in two ways. Most of all, government policies cannot directly influence consumption, investment and exports as the actors of these sectors are different. Consumption belongs to households, corporations invest and overseas nations purchase Korean products. But the government can exercise exclusive influence on budget expenditures. If the government runs out of cash, it may want to issue bonds to fill in the gap. The government is the only economic entity that decides how much and where to spend first, and then collects the required finances later.

Government spending is also political, because the spending closely reflects the interests of the ruling party. There is no ruling party that will reduce government spending before the election, since the move would be unpopular for the party. If this holds true for the Korean economy in 2002, when presidential and local elections take place, Korea may enjoy an ephemeral economic recovery and slump to recession, as it did two years ago, if the government calls to expand government spending. Already there are signs to increase spending, such as premature implementation of the budget and the expansion of public funds' investment in the stock market.

The flooding of the Nile Valley was the product of natural order, which is hard to predict, but the inflation after the elections is the result of excessive government spending.

I am not trying to discourage the economy, which is in progress of recovering. There are many hurdles to overcome, such as the changing trend of international business, suspension of restructuring at Korean firms and groups only pursuing self-interest.

The problem is the economy will recover naturally, but the government's desire to make it even better may in the end ruin everything.


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The writer is an editorial writer of the JoongAng Ilbo.

by Joseph W. Chung

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