[OUTLOOK]Pump-priming has some pitfallsWhen the speculative bubble burst in international financial markets in April 2000, economists were busy trying to forecast the future after what some saw as the early end of the new economy.
The shock of the terrorist attacks of Sept. 11, 2001, forced them to face the reality that new approaches were needed. The world economy, they predicted, would no longer follow the rules of the 1990s.
Instead of trying to find a new engine for economic growth, advanced industrial countries began to adopt deficit financing, a long-standing thorny issue in the public sector, as a policy means to solve the urgent problems of reducing unemployment and increasing consumer spending.
The U.S. government said it would report budget deficits every year through 2008. Japan has already been trapped in a vicious circle of deficit financing and the European Union is no exception to the turn to fiscal stimulus through deficit spending.
One thing that is clear is that there have been changes in the priorities of running the economy. Government has gained growing influence in solving economic and social problems. Unlike the 1980s and 1990s, when emphasis was put on the ability and efficiency of a free-market economy to solve problems, ordinary people now also seem to trust in the government's intervention.
Consequently, increasing public sector debt will be the focal point of economic policy from now on. This is the economic reality of advanced countries that dominate the world economy today.
The reality of the Korean economy seems to be no exception. Along with its structural vulnerability, the Korean economy faces low growth due to a lack of overall demand because of reduced investment and spending.
It also faces the limitation that total demand can no longer be increased by resorting to market mechanisms. Korea cannot overcome the present economic situation solely through the private sector and the functioning of the market. Therefore, people emphasize the need for the government's planning and coordination of economic policies and ask for aggressive and effective economic policies.
For example, to facilitate investment, the Federation of Korean Industries is officially demanding that the president meet with the heads of the top 10 jaebeol. It is common sense in the free-market system that a company will invest only when it expects a profit.
But will investment be forthcoming when the prospects for profits are dim but the president has a tete-a-tete with the heads of the conglomerates? Of course not. The federation’s move demonstrates its tendency to rely on government policy rather than to trust in the functioning of the market.
Frankly speaking, the Korean economy has been barely sustained only by the 159 trillion won in public funds poured into the economy after the financial crisis in 1997, an accumulated budget deficit of more than 120 trillion won, the creation of demand through other public funding and greater household debt. There is no denying that the increase in public sector debt played a critical role in maintaining the economy since the financial crisis struck here.
But the present economic situation again calls for a more active government role. Even with plenty of money in the economy and interest rates at a historic low, investments are not being made. Households have reached the limit of their ability to boost spending further within current income levels and businesses are hesitant to invest because of the uncertain prospects for profit. Also, considering the international economic situation, one cannot have much expectation that Korea will be able to promote growth by expanding demand for its exports. In the final analysis, the only way to increase total demand in order to facilitate growth and maintain employment is to expand the government budget.
Given the current Korean macroeconomic indicators, the revised supplementary budget of 4 trillion won submitted to the National Assembly by the government seems insufficient to be the turning point for a sustainable growth. As a consequence, the government will probably have to use more deficit spending to create additional demand. But the government should pay attention to the principle that when the financial resources acquired through budget deficits are not used to invest in social capital or education, today's budget deficits impede the economic growth of the future.
In particular, the government should recognize that public-sector debt rose sharply in a short period after the International Monetary Fund's bailout of the Korean economy.
As can be seen in the case of Japan, the government should also know that if a policy to expand spending is not accompanied by continuous restructuring, it cannot build a stable foundation for the Korean economy.
* The writer is a former senior presidential secretary for economic affairs. Translation by the JoongAng Daily staff.
by Kim Chong-in
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