[OUTLOOK]Governor should show courage“When the growth rate is around 4 or 5 percent and the inflation rate is 2 to 3 percent, the benchmark interest rate should be 6 to 8 percent, according to humble economic common sense. In this respect, it is a problem that the call rate is only 4 to 5 percent.” This was what Bank of Korea Governor Lee Sung-tae said in a lecture at Busan University in late October. This clashes with expectations from politicians and the government for the bank to lower the call rate to boost the economy.
Mr. Lee’s remark reminds me of a story about the 2002 monetary policy.
Starting in early 2002, the economy was rapidly restored with a 6-percent quarterly growth rate, compared with 3 percent for each quarter in the previous year. Housing prices started to show extraordinary symptoms as well.
In the spring of 2002, some economists, including myself, talked about “simple common sense on the economy” and insisted that the target for the call rate be increased by 3 percent point from 4 percent.
Former Governor Park Seung, who had just started his job at the time, knew a preemptive policy on the interest rate was needed. But the economy and finance ministry interrupted and blocked the bank because the ministry thought that would be like cooling down an economy that had just started to revive. In 2002, the growth rate was 7 percent, but the Bank of Korea raised the call rate by a mere 0.25 percent in May.
What would have happened if the Bank of Korea had raised the call rate to more than 6 percent in 2002? We can assume that at least two things would have happened. First, real estate prices would not have increased this much. Second, the failure of monetary policy would have been blamed for the fall in the growth rate to 3.1 percent in 2003.
It was unfortunate for our economy when we think about the first possibility. But when it comes to the second possibility, it is very fortunate for the Bank of Korea. The status of the bank would have fallen to rock bottom because the administration and the governing party would have said that the national bank ruined the economy by taking inappropriate preemptive measures.
As our economy has been shrinking since the administration entered office, the Bank of Korea played along and lowered the call rate to 3.25 percent. However, that only made real estate prices unstable, instead of reviving consumption and investment. It was an indecisive and weak move by the central bank.
In our economy, wages, rent and land prices are too high. People no longer want to do physical labor. The birth rate is getting low and the population is rapidly aging. These problems seem to have caused the potential growth rate to fall to a 5-percent level from a 6-percent level in the 1990s.
The economic field used to require the Bank of Korea to release cash and to lower the interest rate in the past. But economic experts no longer ask for such moves. They only demand that the regular labor market become flexible and that government regulations be eased. The academic field makes the same demands in order to enhance the nation’s competitiveness and to raise the potential growth rate.
But the administration has never listened to these people. It has focused on big ideas such as its four reform agendas, the transfer of capital and fair distribution, instead of working to create a drive for growth or enhancing the nation’s economy. This anachronistic approach resulted in the “strike of capital,” further decreasing the potential growth rate by 1 to 2 percent point.
The administration is very unlikely to change thoroughly during the rest of its term. Because the government focused too much on major issues, there was no room for a micro adjustment of the interest rate to work. That will be the same for the rest of the administration’s term.
Thus, to take preemptive measures to lower the interest rate, as politicians and the government want, will only be to make the same mistake again. Even if the growth rate stays at a 3-percent level next year, one should be clearly aware that the growth comes from the inertia of the economic potential.
The interest rate policy should be wholly left to the Bank of Korea. The bank should not be afraid of the criticism that it does not have a realistic perception of the economy by politicians and the media and should do what it believes is the right thing to do. Now that Governor Lee has made a courageous remark, he should show his determination to implement an interest rate policy that is right according to common sense.
*The writer is a professor of economics at Chung-Ang University. Translation by the JoongAng Daily staff.
by Ahn Kook-shin