[OUTLOOK]The Economy Needs Rational Thinking

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[OUTLOOK]The Economy Needs Rational Thinking

Our government is now trapped in the folly of its ways. It rather resembles a hunter who, unaware that he is incapable of catching even one rabbit, is dreaming about which of two good specimens he will choose.

There are too many goals to attain, and as the government dithers, conditions are deteriorating in this transitional period of structural reform. The array of policy enforcement measures from which to choose is becoming more and more limited. Yet the government reiterates its promises as if it can do everything.

Economics is a science of rational choice. With limited economic resources, there are bound to be arguments over which policies to adopt. Limited potential measures mean that not all goals can be pursued at once. In this case, policy goals should be prioritized. But the rewards and costs of reaching a certain goal cannot always easily be calculated in advance. Conflict over which measure to choose are therefore inevitable.

There is one thing we have to keep in mind. Rational choice does not necessarily mean salvaging one goal at the expense of another. Even when policy goals appear to conflict from a short-term point of view, in the long term they can be complementary. In other words, though we cannot catch two rabbits at once right now, in the end we can have two in the bag. When we choose policy measures, we don't have to select just one goal. If one hunting dog is inadequate, then we can use two dogs together.

But the conversations on the economy I have listened in on lately contain few references to rational choices. Instead, they always seem to be a battle between extreme alternatives. A conspicuous example is the so-called dichotomy between economic stimulus and structural reform. Of course, it is right to be cautious about a dwindling will to structural reform when the economy gets brisker. But it is ridiculous to force a choice between the short-term goal of regulating the economic cycle and the long-term goal of structural reform and the reduction of economic uncertainty.

The core question in this situation is whether the policy enforcement measures taken either for structural reform or to boost the economy will actually be effective. Despite the expenditure of a tremendous amount of public funds, structural reform has made poor progress. The government must overhaul the evident fundamental problems in its existing policies. I also doubt whether we are equipped with policies that can get us out of this economic trough. Temporary expedients and belated measures just aggravate the side effects.

In operations such as these, order must reign. At this time, the government has to concentrate on making its policies work. Once the government has fitted the right policies to the right goals, coordination of priorities will be surprisingly simple.

In terms of structural reform, time is not of the essence - market confidence is. Once the market has been presented with a credible blueprint, uncertainty will quickly fade. It is impossible for the market to recover its confidence if the government hides information, evades responsibility and is constantly bewitched by fluctuating external factors when devising new measures. It is time for both the ruling and the opposition to be more patient and reach an agreement on a comprehensive revision of economic policies which the next administration can live with. It would be good if the government could place problems related with state-run pensions and national debt and the creation of long-term countermeasures on the public agenda for public debate.

It is also desirable to coordinate policy measures. Changing just the interest rate or the tax rate or fiscal spending will have limited results. Policy measures should not be randomly employed as goods are displayed at a department store, but should aim for mutual reinforcement. Policymakers should not be forever bobbing in the wake of economic cycles, but must strike preemptively.

Once the necessary policy tools have been coordinated, policymakers should turn to helping companies invest and provide job training. This approach will not only promote demand but will enhance competitiveness on the supply side and complement the ongoing economic restructuring. It seems everybody is blaming the overall downturn in the world economy for our problems, but the declining competitiveness of our companies is another reason for decreasing exports.

Rather than employing measures such as cutting income and value added taxes - consumption-pumping measures which have high costs and dubious effects - let's help companies invest. The government should eliminate the cap on the debt-to-equity ratio and on internal investments by conglomerates, and adopt systems to enhance management transparency to promote competitiveness.

There can be no "best" policy measure at this time. The rational choice is to calmly assess the state of the economy and come up with the best possible set of policy measures.


The writer is a professor of economics at Ewha Womans University.

by Jun Joo-sung

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