[OUTLOOK]Interest rate hike not a good ideaDemands have recently been made to raise interest rates. Too much money has been released in the market and there is a danger of consumer prices going up, people claim, and such an overflow may lead to real estate speculation.
However, raising the interest rates would be a very dangerous solution to such a problem.
Increased interest rates might absorb the overflow to some extent, but this would also make the economy retreat rapidly. Our economy has barely gotten out of the recession with the help of consumption and investment in the construction industry, yet the economic development structure remains weak, with exports and investments still shaky.
Even the rise of consumption and construction investment that has led the economic recovery is expected to curve downward in the latter half of this year. With external factors such as the shaky U.S. economy, there's a strong possibility that our economy might face a slowdown. In this situation, using the excuse of possible inflation pressure that hasn't even happened yet to demand an increase in interest rates would be the worst policy possible. It could drive our economy into a long-term recession.
Also, there is an order to things when it comes to solving the issue of real estate speculation in the Gangnam area of southern Seoul. We must first find out why there is such speculation in the Gangnam area and act accordingly with administrative measures. The Gangnam area has more hakwon, or preparatory academies for college entrance exams, than other areas. Should this comparative advantage in the education environment be the reason people are speculating on Gangnam, then such an advantage must be dispersed among other areas as well.
The next step would be to track those speculators who habitually invest in properties in Gangnam, and tax them heavily. Even if it takes the entire prosecutors office and the National Tax Service, these real estate speculators should be rooted out and made to pay higher taxes so that they won't speculate in any real estate, let alone in the Gangnam area.
In early September, in an attempt to uncover this problem, the government strengthened tax regulations on real estate ownership and transfers in areas where speculation was heavy. As part of the intense real estate measures, speculators will now be subject to criminal prosecution. To demand an increase in interest rates when these real estate measures haven't even had time to show their success is being too hasty.
Thus, only as a last resort would it make sense to increase interest rates.
Real estate speculation is a problem that is only occurring in the Gangnam area of southern Seoul. Why must a measure that would affect the entire country, such as raising the interest rates, be taken as a solution to this problem?
A few days ago, the Samsung Economic Research Institute announced that the 510 listed domestic companies had earned a record net income of 1.7 trillion won ($1.4 billion) for the first half of this year, but that was due to the stability of the interest rate and exchange rate. Converted to the interest and exchange rates prior to the financial crisis, the companies have on the contrary lost 1.8 trillion won, the institute reported.
This shows that although our companies have started to make profits after restructuring measures were taken following the 1997 financial crisis, they have yet to regain their real strength
The exchange rate might be stable at the moment, but there is no telling how and when it is going to change. Raising the interest rate at such a time would be a great risk for our companies.
The greatest achievement of the Kim Dae-jung administration is bringing the interest rate below 10 percent. The interest rate that had been more than 10 percent for 30 years had finally been lowered to below 10 percent in 1999 thanks to the vigorous low-interest rate policies of the government. Why should we retrogress even before seeing our companies benefit from this?
Even now Korean companies face a comparatively higher loan interest rate than their counterparts in major competing countries such as Japan and China. The average loan interest rate for Korean companies at the moment is 6.5 percent, 1 percent higher than China's 5.3 percent and five times higher than Japan's 1.3 percent. In fact, we should be lowering our interest rate to 5 percent if we want to compete with China, whose products are fast chasing ours in the international market.
Raising interest rates would only weaken companies that are the foundations of our economy and increase the burden on our economy. Let's not, as the old saying goes, burn the cottage to kill a flea.
The writer is the chairman of the Korean Chamber of Commerce and Industry.
by Park Yong-sung