[OUTLOOK]Financial policy needs overhaul

The Korean economy has suffered from events both at home and abroad in 2003. Overseas, there were the outbreaks of the Iraqi war and SARS, severe acute respiratory syndrome. At home, there were large-scale labor-management disputes, the insolvency crisis of credit card companies and the problem of household debts.
The direction of the Korean economy in 2004 depends on what happens at home rather than overseas. If international circumstances are any indication, the Korean economy is likely to emerge from the recession and make a quick V-shaped recovery.
The world economy has shown remarkable improvement in the latter half of this year, thanks to the U.S. economy, which recorded about 8 percent growth in the third quarter; China’s continued high growth; the recovery of information technology markets across the world, and the signs of Japan’s escape from its long-term stagnation.
But the domestic conditions are expected to remain unsettled in the next year. Above all, the problems of credit defaulters and credit card debts are unlikely to be solved soon. Moreover, rigid labor-management relations, negative perceptions of businesses, the prosecution’s campaign finance investigations, the emergence of China as an economic power, manufacturing companies’ move to foreign countries, and shrinking investment confidence make it difficult to expect the economy to turn around.
Given all these circumstances, the Korean economy in 2004 will find it difficult to churn out more than latent growth rate. In the worst case, it has the possibility of falling far behind the growth of other Southeast Asian countries except for China and Japan.
To overcome these crises, the Korean government should immediately come up with measures that encourage businessmen to invest and calm the instability of the people. In particular, the role of public finance and government policy is more important than ever.
Unfortunately, the financial market is locked in a stalemate as short-term funds of about 400 trillion won ($338 billion) are not circulating properly. It is concerned that an additional cut in interest rates may only result in increasing real estate prices. Therefore, monetary policy has limitations.
In the present situation, the only domestic economic means that we can mobilize is fiscal policy. The economic stability of the Korean economy has weakened so much that its business fluctuations after the financial crisis in 1997 have expanded 3.7 times compared to the period before the crisis.
If the government does not properly carry out its financing role, we can hardly expect constant and stable growth in the next year and in the years to come.
Next year’s budget, which has been submitted to the National Assembly, falls far short of sustaining the current economic growth rate. It is reduced 0.5 percent compared to this year’s budget, including the second supplementary budget.
Considering that fixed expenditures such as defense and general administrative expenses and grants to local governments account for more than 30 percent of the budget, we cannot expect that at the present figures, next year’s budget will carry out any economic control function.
For our economy to recover to some degree next year, a more positive financial policy is required. As the International Monetary Fund has recommended, the government should also consider using deficit financing, if it is necessary. Despite the concerns over deficit financing, there are no other methods that can currently spur the economy when it is difficult to apply a monetary policy.
Recently, our government has focused on maintaining a balanced budget, so it has relative leeway in its operating budget and does not have much inflationary pressure because of sluggish spending and investment.
What matters more than whether Korea should be using deficit financing is how to use the money, the taxes from the people, efficiently.
The focus of financial policy should not simply be on boosting the economy but on unlocking the economic stalemate through the efficient use of the budget while expanding medium and long-term growth potential.

* The writer is the executive managing director of the Samsung Economic Research Institute. Translation by the JoongAng Daily staff.

by Cheong Mun-kun