[VIEWPOINT]Force-Fed Consumption Not the Answer

Thrift and savings are generally considered as virtues. In Korea, Oct. 26 has been designated as Savings Day since economic development began in the 1960s.

The government has awarded individuals and institutions that recorded significant amounts of savings or that should be respected as a role model by practicing "sound consumption." A ceremony to celebrate the 38th anniversary of the Savings Day was recently held.

Large amounts of savings by the people are mandatory to fuel investments and amass the resources required to stimulate the economy; domestic savings will decrease the need for foreign borrowing. Despite that principle, the government recently promoted increased consumer spending as a way of resuscitating our economy. What a deplorable situation that is!

Last year, total consumer spending comprised 50.4 percent of gross domestic product. The people consumed more than half of the goods and services produced in our country.

Economic conditions overseas are deteriorating and exports are declining; the domestic economic outlook is uncertain and companies are reducing their investments. Under such conditions, an increase in domestic consumption, which comprised a significant portion of the nation's economy, will trigger new investments and open up new employment opportunities. Such an explanation is part of a standard macroeconomic perspective.

Consumer spending has been on a steady long-term rise as incomes of our entire population have grown. Yet in a short-term perspective, consumer spending is sensitive to several domestic and foreign economic pressures. Because the economic outlook is uncertain, the demand for durable consumer goods such as cars, television sets and refrigerators will fluctuate even more widely － again, nothing surprising there. Such a trend in consumer spending was demonstrated clearly at the time of the foreign exchange crisis in late 1997. Before the financial crisis, consumer spending in 1997 reached 54.1 percent of gross domestic product, but the figure dropped to 50.4 percent last year. Therefore, many would believe that if consumer spending recovers its more vigorous pace, it will cover the losses generated by slow exports and help the economy revive.

Yet, a problem still remains; will consumer spending recover through forceful government intervention? Dwindling consumer spending after the foreign exchange crisis was caused by uncertainties inside and outside the country. In addition to such uncertainties, the recent terrorist attacks in the United States further weakened the impulse of consumers to spend money.

The only way to normalize consumer spending is to eliminate the uncertain factors in our economy as much as possible. It is, of course, impossible to control external uncertainties, but the government can reduce the uncertain factors in our economy by carrying out sustainable and proper policies.

Most of all, the government should accelerate restructuring in the financial and corporate sectors. It should also remember that stopgap measures and lip-service policies will darken the cloud over Korea's economy and generate ill effects even in the short term. The government should hew to the right path especially when conditions are difficult.

That is the way to restore confidence. Seoul should learn a lesson from recent Japanese history: Putting off restructuring for 10 years to gain political popularity created the current economic slump.

There is another important point that we should remember. Korea lacks resources; increased consumer spending will trigger increased imports of raw materials and crude oil. That will eventually create a trade imbalance.

In Korea, has it ever been possible to produce and transport goods to consumers without using imported raw materials and energy?

The government policy to encourage consumer spending, appealing to patriotic sentiment, can only be ineffective. It will also glorify spending instead of thrift in our household. Promoting consumer spending can also bring social chaos, in which prodigality becomes praised.

Consumer spending naturally grows as disposable household incomes increase and the economy stabilizes. There is no need for the government to sanctify spending. At the same time, the people should not decry natural increases in spending as lavishness.

-----------------------------------------------------------------------

The writer is chairman & CEO of the Institute for Global Economics.

by Sakong Il