[VIEWPOINT]Dreaming that Roh ignores the economyPresident Roh Moo-hyun’s unrefined speech at the National Unification Advisory Council triggered huge political repercussions.
According to the records of his remarks, he lightly touched on economic issues, saying the economy is fine. Although many people felt sorry that he did not mention the current issues, such as the real estate problems, I felt relieved. Hopefully, in the next year, the president will devote himself only to politics as he does now, leaving the economy alone.
Real estate is a typical example of how things went wrong because of the president’s political convictions and his excessive intervention in the economy. All of the economists who participated in the government’s measures on Oct. 29, 2003, said, “The Blue House at that time did not even allow us to mention the supply of apartments.” The Blue House only ordered that measures be sought regarding management, including restrictions on housing reconstruction, a comprehensive real estate tax and a lowering of the loan-to-value ratio.
Why was that? Economists guess that because the president was interested only in balanced regional development and the construction of an administrative complex city, the Blue House avoided the issue of building apartments in the metropolitan area.
As a consequence, the supply of apartments in the Seoul area ended up being less than 200,000 households on average per year. Before then, the annual average was 300,000 units. Only after the announcement of comprehensive real estate measurements on Aug. 31, 2005 did the Blue House begin to allow the supply of apartments to be expanded. (The project for the newly planned city in Pangyo in the suburbs of Seoul had been reviewed since 2001.)
Since then, a plan to build a new city in Songpa, Seoul, has appeared, and the focus of the measures taken on Nov. 15 has completely shifted toward the expansion with new cities. What would have happened had the supply of apartments been increased starting in 2003? By now, new apartments would be pouring out in earnest. Had that been the case, the real estate disaster might have been prevented.
The occurrence regarding foreign exchange restrictions in Thailand some time ago is of no business to others. Many countries are distressed about the excessive influx of “hot money.” The deterioration of the international financial market is bound to break out at the weakest part of the ring. Korea’s current account surplus was about $6 billion this year. But the amount of money borrowed from banks abroad during the same period was as much as $40 billion. Most of the money was the so-called “yen carry trade,” borrowed at a low interest rate from Japan. Because they gained profits from the differences in the interest rate and the foreign exchange rate, the banks didn’t refuse the business. The problem is the impact of this unbalanced influx of the money on the overall economy.
The short term international banking loan that flowed into Korea this year exceeded the increase in housing loans by $30 trillion won. The real estate bubble has been inflated further as the liquidity overflow is evident in the market and the hot money is added there. This is none other than a sand castle built on debt. The main cause for the steep appreciation of the Korean currency, the won, has been this hot money.
We are truly worried about next year’s economy. Speaking only about real estate, we face many tax traps, including the comprehensive real estate tax and the capital gains tax. In two years, apartments in new cities will be completed in large numbers.
If next year’s current account turns to become a deficit, the hot money will flow out first. Even left alone, real estate prices might drop by half. Even so, politicians are poking about in the real estate bubble, targeting the people’s sentiment. The presidential election is drawing near when political pledges such as “cutting the apartment prices in half” appeal to the people. In this situation, a soft landing for our economy would be impossible and economic difficulties, such as what Japan faced, would be unavoidable.
Considering its foreign exchange reserves of more than $230 billion, Korea is not likely to have a foreign exchange crisis all at once. But we have met with trouble many times by neglecting warning signs that the economy is losing balance. Fortunately, the deputy prime minister of finance and economy and the governor of the Bank of Korea have begun to speak up about the instability of the next year’s financial market.
The Korea Development Institute and other economic research institutes have also come forward to warn against the possibility of a burst bubble in real estate and a crisis in household loans. How about leaving the economy completely to these economic experts for about two years? This would mean neither the president nor the presidential candidates can intervene in the economy.
But our dream was broken in the cabinet meeting yesterday as President Roh said, “I will take care of all state affairs, however difficult and bothersome they may be.” Our dream that economic problems would be solved based on economic logic did not last even five days.
*The writer is an editorial writer of the JoongAng Ilbo.
by Lee Chul-ho