[VIEWPOINT]Righting a tottering economyThe Korean economy is getting worse. The value of the Korean won against the U.S. dollar is sinking and local stock prices have plummeted. The trade balance has fallen into the red. As commodity prices continue to increase, the economic slowdown is accelerating and signs of stagflation loom. In addition, labor disputes are expected and the book-rigging case at SK Global is rocking the financial market, making the economic outlook more gloomy.
The government has to come up with countermeasures as soon as possible. But the government is having a hard time finding the proper measures to cope with the economic deadlock. The economic problems we face mainly stem from non-economic external factors, like a U.S.-led war against Iraq and the North Korea nuclear issue. But the policy limits that arise from flaws in fundamental structures are more worrisome.
The industrial structure and financial markets of our economy are not sound enough to endure an oil shock and foreign investment flight. To deal with stagflation, the government has to change its fiscal policy to stimulate consumer demand by expanding spending, and it has to stabilize commodity prices by raising interest rates or by cutting the amount of money in circulation as part of its monetary policy. These are the basic prescriptions.
But monetary policy has lost its function because it has fallen into a liquidity trap triggered by the super-low interest rate policy carried out by the government to spur consumption and investment. As the government also is confined by the policy dogma of a “balanced budget,” it is actually hard for the government to expand its spending to the extent needed.
There are several controversial issues surrounding policies that the government is pursuing. The first concerns the level of interest rates. Though some economists assert that interest rates should be lowered to boost the economy, demand inspired by a rate-cut can be ignored, taking into consideration the non-elasticity of investment under the current economic environment.
The focus is not on raising or lowering interest rates, but on restoring prices as a function of interest rates by keeping rates at an adequate level. In particular, to revive the link between long-and short-term interest rates, the government needs to intensify the role of the central bank in the bond markets and to boost bond markets trading junk bonds or asset-backed securities.
The second issue is about maximizing the business ad-justment function of fiscal policy. The government needs to expand its spending into deficit finance as well as executing the budget earlier than scheduled as countermeasures against stagflation, not as active economic stimuli. The government also has to lure corporate investment and stock investment through deep corporate tax cuts and tax breaks on stock dividends.
It would help if the government set a balanced budget as a mid-term goal. If the government is reluctant to adopt a corporate income tax cut because such a cut is contradictory to its goal of economic justice, it is wrong. It is more urgent for the time being to create jobs by restoring business vitality than achieving a more equitable distribution of wealth. Further-more, the government should cut corporate taxes to attract foreign direct investment.
Distribution policy should not be dealt with as a zero-sum game. Such a view of distribution might narrow relative income discrepancies, but it will cause class conflict and confrontation by increasing the possibility of a lowering of the absolute income level.
Third, the government should endeavor to stabilize commodity prices to achieve economic justice. The new administration set distribution equity at the top of its policy agenda. Stabilizing commodity prices has a special function in pursuing the equitable distribution of wealth.
Inflation that distorts the effective distribution of sources will benefit businessmen and asset owners, but will harm the real incomes of salaried workers and the poor. Therefore, economic injustice will grow worse.
A look at supply-side factors, like higher prices for oil and raw materials, and the demand-side factor of inflation, which can be expected due to the excessive liquidity, casts prices in the second half of this year as uncertain.
As the government has only limited options for short-term policies to prevent the Korean economy from sinking further, it should try to build policy infrastructure and reform the economic structure to enhance policy efficiency.
The government also should eliminate uncertainty and aim for the stabilization of people’s thinking on economic subjects by elucidating its policies on conglomerates and labor.
Now is the time for politicians of the ruling and opposition parties to cooperate to sail through the precarious economic seas to vitalize the economy and lessen the nation’s economic plight.
* The writer is president of the Hyundai Economic Research Institute.
by Kim Joong-woong