[OUTLOOK]Economy needs help from allThe distance between Seoul and Washington is increasing. Even the economies of the two countries, which have trodden synchronized paths until now, have started to go their separate ways. The discrepancy between the two economies was shown clearly in the rate cut Seoul announced last week; the United States is raising its rates preemptively to prevent overheating the economy. On the other hand, Korea was willing to lower its rate to the point of putting the real interest rate in the minus column in efforts to revive its staggering economy.
The Unites States was not the only country that has raised its interest rates recently. Japan as well as Europe and Southeast Asia are enjoying an economic boom. We seem to be the only ones in gloom. A foreign diplomat in Seoul observed that Korea is seemingly becoming a political loner in the world. Now, it seems as if we are about to become an “economic loner” as well.
How much help will this rate cut be to our economic recovery? Our real interest rate is already in the negative range. Could a rate cut of 0.25 percent really boost consumption and revive investment as the authorities are hoping it will?
Many economists are voicing doubts.
The lack of investment and weak consumption is not due to high interest rates. The biggest reason people or firms won’t spend money in this country even when they have plenty is because the direction our society is headed in is making investors and household consumers uneasy. No matter how low the interest rate is, it won’t do much help raising consumption if there are no jobs and household debts are piling up. Of course, the interest rate cut would lessen the financial burden of exporting firms and ameliorate their profitability now compromised by the revaluation of the won. In certain parts of the country, it could boost real estate sales. Nevertheless, the effect the interest cut will have on encouraging new investments will be limited.
With investment and household spending down, the next alternative we can turn to is the government. That is why Seoul is expanding its budget, increasing social overhead capital by mobilizing pension funds and apparently increasing investment in small- to mid-sized firms in the IT industry. While there is much debate over the details of the policies, it is highly desirable that the government is rolling out proactive policies to save the economy.
Nonetheless, the costs are enormous. The government would need to spend 10 trillion won to raise the growth rate 1 percentage point. Even in this case, we can’t have high hopes, if the government concentrates on investments in welfare, not growth.
To make things worse for exporting firms, the exchange rate has been steadily dropping. In fact, the revaluation of the won is part of the economic recession. The booming world economy has increased our exports, while the lack of investment in domestic industries have suspended the imports of capital goods. This has resulted in a surplus in the current account balance. Dollars we have a-plenty, and the exchange rate of the dollar naturally goes down as its value vis a vis the won drops.
This, however, does not mean that the revaluation of the won will help revive domestic demand: It will only affect our exports negatively. Is there no way to save our economy from the devil on the one hand and the deep blue sea on the other?
The bigger our troubles, the more we should stick to basics. Firstly, if the main reason for our recession is in the lack of domestic demand and not external factors, the government must step up more boldly to address the issue. It should implement a broad range of fiscal spending and tax cut policies. It should also announce a consistent policy direction.
The most important is that the government can’t revive the economy alone. It must persuade investors who are abandoning the country to change their minds. The government should induce private sector investment with market-oriented growth policies and bold de-regulation. It must give hope and expectations for the future.
Our government should not obsess about controversial reform policies that bring social strife, but concentrate our national energy on the economy. Economic growth might have unwanted side effects, but growth will only aggravate the difficulties of the impoverished and those living below the poverty line. The economy can only be revived when the government, firms and households work together. No matter how hard the government cries out alone, the economy won’t move of itself.
* The writer is a professor of economics at Yonsei University. Translation by the JoongAng Daily staff.
by Jeong Kap-young