[OUTLOOK]Another look at a ‘New Deal’For the first 30 years after the World War II, Keynesian economics ruled the Western world. It taught that an economic depression could be stopped by coordinating aggregate demand.
When dwindling consumption or investment triggered a recession, the government could promptly boost aggregate demand with tax cuts and public investment. But Keynesian economics took a blow in the early 1970s when “stagflation,” a phenomenon of inflation and recession occurring together, emerged with the oil shock and other developments.
A new school of economists promoting a “real business cycle theory” emerged, arguing that instead of concentrating on demand, attention should be fixed on enhancing productivity through deregulations and technological developments.
The Roh Moo-hyun government has puzzled the public by announcing that it would launch a “Korean New Deal” that is based on the New Deal programs that U.S. President Franklin D. Roosevelt promoted during the Great Depression in the 1930s, when Keynesian economics was new and promising.
Even if we put aside the historical fact that the United States overcame the Great Depression not because of the New Deal but because of World War II, we surely remember the example of our neighbor, Japan.
Japan tried in vain to overcome its “lost decade” by spending 25 percent of its gross domestic product on public programs. The Japanese economy has only recently started to show signs of recoverery, thanks to reform measures and the strong demand from the fast-growing Chinese economy.
If public spending is the key to our problem, how can we expect to survive the present economic crisis by only investing less than 1.5 percent of our gross domestic product, or 10 trillion won ($9.3 billion) in public projects?
The Korean New Deal is not to be criticized altogether, however. It signifies that the Roh Moo-hyun government has at last acknowledged the seriousness of the economic crisis and showed determination to find an exit.
Not only that, the Korean New Deal program rightly concentrates on the fact that our nation’s competitive edge is compromised by high distribution costs due to the lack of proper infrastructure. Therefore, we shouldn’t only criticize and oppose the Korean New Deal; we need to find ways to lessen the accompanying risks and ensure that this policy succeeds.
First, the New Deal projects that are to be funded by the national pension fund should include only highly profitable social overhead capital projects and avoid pork-barrel projects doled out to miscellaneous agencies all over the government.
The projects promoted by the Ministry of Science and Technology and the Ministry of Education should be excluded from the New Deal plan and funded separately through the national budget. That is the only way to win public confidence in the operation of the national pension fund.
Second, although small in size, projects that ensure big economic effects by eliminating obstacles should be included. These projects include construction of roads to industrial complexes that were delayed due to the regional egoism of local governments.
Third, the New Deal program should not have a set spending budget of 10 trillion won. The budget should be decided flexibly after all projects are reviewed and the most profitable ones selected.
If we are obsessed with the total amount of the budget, we could either end up spending too little or too much.
The success or failure of the New Deal plan will depend on just whether we select projects with the highest profitability and economic effect.
Until now, the projects that the government has been involved in have mostly failed to reach the target profit rates because of a lack of demand or excessive costs. These failures have put a heavy burden on government finances.
The government is planning to transfer the function of reviewing project proposals from the Private Infrastructure Investment Center of Korea to the Korea Development Institute, but the institute in its present form is extremely short-staffed for such a job. Institutes such as the World Bank have at least three to four people, including project engineers and financial experts, working as a team to review a project proposal. The government will need to support the budget necessary for the Korea Development Institute to hire the personnel necessary to review the social overhead capital project proposals effectively.
Another possible measure would be requesting temporary technical support from institutions such as the World Bank and the Asian Development Bank, which have years of experience in social overhead capital investment.
Finally, the government must remember that the Korean New Deal is only a “second-best” choice for the advancement of our national economy. Together with the New Deal investments, we need to enhance our competitiveness through reforms in regulations, labor-management relations and anti-corporate sentiment.
The Korean New Deal can get rid of a part of the structural weakness of our economy, but it cannot fix everything.
* The writer is a professor of international finance at George Washington University. Translation by the JoongAng Daily staff.
by Park Yoon-shik