[NOTEBOOK]A lost chance, a bad outcomeIn the fall of 1997, when the foreign exchange crisis was approaching, there was news on television as follows: Government officials in charge of foreign exchange at the Ministry of Finance and Economy were working late into the night, having Chinese black noodles in the office for dinner. They made firm resolutions to “protect the foreign exchange market from speculative foreign capital.” But the foreign exchange crisis came soon. The crisis could not be prevented by a few officials working all night at the last moment.
The foreign exchange crisis was already going on in 1995 and 1996. With the presidential election coming at the end of 1997, the government put the first priority on stabilizing prices and keeping per capita national income at $10,000. In 1996, the current account deficit reached a record $23.1 billion, but the issue was put on the back burner.
To reduce the deficit, the government should have expanded exports by boosting the exchange rate of the Korean won to the level the market wanted. But it did not do so. The reason was that if the exchange rate of the won rose, prices would go up and jeopardize the goal of reaching $10,000 per capita national income. So it kept controlling the exchange rate at the level of 800 won per dollar.
The result of failing to adjust the foreign exchange rate at the proper time manifested itself in the foreign exchange crisis in late 1997. As the defense line for the exchange rate collapsed, the rate of the won to the dollar soared to 2,000 won per dollar. The dream of achieving $10,000 per capita national income was helplessly broken, too. It took three years to recover the per capita national income to the level of $10,000. If they had prepared in advance, the public officials would not have had to eat Chinese black noodles, nor would many people have suffered the pain of losing jobs that winter.
Was it a coincidence? A while ago, I happened to read a news article similar to the news of 1997. The article said public officials had to board together for a month to devise the reform measures of the real estate system announced on Aug. 31. Their firm resolution to “protect the people from real estate speculation” was the same as that of 1997.
The process was similar too. The real estate bubble began to appear as early as the second half of 2001. At that time, the economy balked at the aftermath of mushrooming start-ups. The government adopted a policy of low interest rates to revive the economy. The Monetary Policy Committee at the Bank of Korea lowered its overnight call rate by 1 percentage point over three months. But despite its intention, the overflowing money in the market rushed into the real estate sector. People lined up day after day to buy newly built apartments.
If the government had tightened the people’s purse strings properly by raising the interest rate immediately, the real estate bubble would not have occurred as it does now. But the government maintained the low interest rate policy. It overlooked the fact that even if money overflowed, businesses did not increase investment. Probably, it would have been difficult to take the risk of adopting a tight monetary policy with the presidential election at hand in late 2002.
Carrying the burden of the real estate bubble, the present administration came into office in 2003. The administration should have set the problem straight back then, but, to the contrary, it lowered interest rates further and poured out development policies that instigated real estate speculation. When real estate prices kept rising, the government confronted the problem with taxes. There is a limit to controlling real estate prices through taxes. It is like building a dam higher instead of draining water when the water in the dam has reached the top. The government cannot have been unaware of this. Some voiced skepticism about taxes as a policy means in the Ministry of Finance and Economy but they were hushed as opinions that did not fit the “code” of the president.
As measures were not effective many times, the government came up with stronger measures with the “tax card.” The final card was the Aug. 31 reform measures of the real estate system. Although the measures included an expansion of the housing supply, their essence was to increase taxes. The government may have had no other option at that critical moment.
The government is blaming speculators for the real estate bubble, but its main cause is the low interest rates that have lasted for four years. The overflowing money flowed into the real estate market and speculators appeared to intrude in the gap, too. If the government had tightened the people’s purse strings and increased housing supply, those without houses would not have fallen into despair, nor would homeowners have worries over tax hikes.
Belatedly, a possible increase in interest rates is talked about. Clearly, floating funds cannot be left alone. When advanced countries continue to raise interest rates, we cannot sit idly by. But the situation seems to have worsened to raise interest rates. Household loans have become too huge, at a total 468 trillion won. The reduced domestic spending due to the real estate reform measures and high oil prices would be a hindrance too.
The United States has flexibly coped with prices and changes in the economy, adjusting interest rates from time to time. Regrettably, we missed the timing for an interest rate adjustment and are in a difficult situation with no way out. I hope the government will reflect on the painful lessons from failing to take the opportunity to adopt a proper policy.
* The writer is a deputy business news editor at the JoongAng Ilbo.
by Koh Hyun-kohn