[OUTLOOK]Slogans no substitute for workIn its first days, the “participatory government” of President Roh Moo-hyun advocated a Northeast Asia-centered economic program, but recently changed its signature campaign to one to achieve $20,000 gross domestic product per capita. Economic slogans have been used by authoritarian regimes to give economic hope to people and gloss over the realities in order to maintain the legitimacy of their extended rule.
Announcing its 15-year economic development plans in 1977, the Park Chung Hee administration advocated the slogan “The Korean economy will catch up with the British economy in the early 1990s.” But the economic reality of the early 1990s proved that those hopes were in vain.
While the British economy continued to grow by reforming and cracking down on labor to free the economy, the Korean economy came face-to-face with the structural problems that had accumulated over the years.
Nevertheless, the Kim Yong-sam administration joined the Organization for Economic Cooperation and Development and announced a 15-year economic plan without recognizing the problems that the Korean economy faced. At that time, its slogan was “The Korean economy will exceed the British economy by 2010.” In line with this slogan, the Kim Yong-sam administration set a goal of $10,000 per capita income.
But the real outcome of its economic policy was the 1997 foreign exchange crisis, the greatest national crisis since the Korean War. One of the major causes of the crisis was the government’s rigid policy on the exchange rate of the Korean currency to achieve its per capita income goal. Although our neighboring trade rivals like China and Japan allowed their currency to depreciate against the U.S. dollar, the Kim Young-sam administration refused to allow the Korean won to fall.
As a result, the price competitiveness of Korea’s exports plunged and the deficit in our international trade account surged to $23 billion. Nevertheless, the government did not depreciate the exchange rate and eventually faced a foreign exchange crisis. This experience clearly demonstrated to the people how much harm an economic slogan could bring to the overall national economy. But the present administration’s economic policy still does not seem to be breaking away from the old practices, regardless of the great changes in people’s awareness and in the economic environment after the financial crisis.
The increase in GDP per capita in dollars can be achieved only partially by increasing the economic growth rate or investment in production facilities alone; it is also closely related to changes in exchange rates. Korea already exceeded $10,000 GDP per capita in 1995 when its exchange rate was 775 Korean won per U.S. dollar. When the won’s value plunged dramatically due to the 1997 foreign exchange crisis, GDP per capita in 1998 fell to $6,700. This experience clearly demonstrated that increases in GDP per capita could not be accomplished solely by pursuing economic growth alone.
Japan’s GDP per capita today surpasses $30,000 as a result of its currency exchange rate; the yen has risen in value against the dollar. A comparison of the changes in the exchange rates of the Korean won and the Japanese yen shows how exchange rates contributed to the rise in GDP per capita. The exchange rate of the Korean won to the U.S. dollar was 120 won to a dollar in 1964, and that of the Japanese yen to the U.S. dollar was 360 yen. Today, 40 years later, it takes 10 times as many won, 1,200, to buy a U.S. dollar. But the Japanese yen has increased in value by 300 percent; instead of buying a dollar with 360 yen, Japanese now can buy one with only 120 yen. If, despite its steady economic growth, Japan had not seen its currency appreciate through international competitiveness, it would not have reached today’s level of GDP per capita.
Competitive new goods and increases in labor productivity are the most important factors of all. But the technological capacity and the situation of the labor market in the present Korean economy is far from able to meet these requirements. In particular, because the present administration’s economic policy has lost the trust of the main players in the economy, the economic slogan of achieving $20,000 GDP per capita does not appeal much to the people.
Therefore, the present administration would be wiser to present a basic framework for resolving the current problems of the Korean economy rather than to suggest vague slogans.
* The writer is a former senior presidential secretary for economic affairs. Translation by the JoongAng Daily staff.
by Kim Chong-in