[Outlook]Economic reality catches up

An election campaign period is usually a hard time for economists. When politicians present rosy pledges of higher growth, fairer distribution of wealth and better welfare, economists worry about costs and warn of side effects.
But things have been changed a little recently. An election period has become an opportunity for some economists. Since our country became democratic, many economists have taken part in presidential election campaigns. Thanks to economists in political circles, economic election pledges are backed by economic logic.
Still, pledges look quite nice if you look at them individually, but they get weird when they are put together. Either scholars can’t stop presidential candidates’ strategies to differentiate themselves from other candidates and their tendency to stand out, or economists cater to the tastes of the political circle. This year is not an exception.
Let’s have a look at the pledges of Lee Myung-bak and Park Geun-hye, two strong contenders in the Grand National Party. Lee has a slogan of “seven-four-seven,” while Park presents a plan to “reduce, lift and establish.”
“Seven-four-seven” means the country will grow at 7 percent annually leading to a per capita income of $40,000, making Korea the seventh-largest economy in the world.
“Reduce, lift and establish” means reducing taxes and government expenditure, lifting regulations and establishing law and order to achieve 7 percent economic growth.
Both present 7 percent growth as a target. Experts estimate Korea’s potential growth rate is at the 5 percent level, but the presidential hopefuls do not listen.
Of course, there are many problems in estimating a potential growth rate. If the government boasts companies, establishes constitutionalism anew and helps find new growth engines, the atmosphere in society changes, and the potential growth rate increases. As our actual growth rate has been lower than our potential growth rate, the effects are expected to be even stronger. When considering all these possibilities, we can have 7 percent growth rate for one year or two. But an annual growth rate of 7 percent is a tall order. The logic behind this is as flimsy as when Roh Moo-hyun presented the goal of 7 percent growth five years ago when he ran for the presidency.
Lee’s plan to provide a $40,000 per capita income and being the world’s seventh-largest economy is more wishful thinking than actual goals. His plan to build a cross-country waterway is full of flaws and problems, just like the incumbent administration’s pledge to relocate the capital. Lee’s plan for a waterway must be discarded, if we look at this from the economic prospective.
To ease regulations and establish law and order are the most important tasks to make our economy and society advance further.
But the plan to reduce government expenditure and taxes is a near-sighted policy, even though it has many good reasons.
Government spending on social development including social welfare tends to be increasing, even though it doesn’t necessarily need to increase as much as in the incumbent administration.
Other expenditures for education, national defense and reunification are the same. Of course, government spending must be reduced, but there are certain limits for that.
Distribution of wealth has become less fair ever since the financial crisis. In the era of globalization, the gap between haves and have-nots tends to expand. The populist incumbent government promised to ease social polarization, but the job is easier said than done.
In times like this, we need politics that make haves willingly pay increased taxes out of goodwill in a bid to unify society and share the burdens of have-nots. If the government wants to reduce taxes, the composite real estate tax, which lacks equity and is ineffective, must be abolished because the income tax is enough to cover those who are now subject to this punitive tax. Quasi-taxes must be abolished, too.
Soon the ruling circle and the Democratic Labor Party will produce their candidates, and they will also pour out populist pledges.
Economists in the government know that the succeeding government must pursue a small government, a large market, reasonable social welfare, wide opening to the outside and a healthy infrastructure in society. In the era of globalization, when a country’s competitiveness becomes increasingly important, all other pledges must be adjusted in accordance with this economic philosophy.
When the next president is elected, the economists who work for him or her must abandon pledges that are at odds with this philosophy.
If they cannot distinguish policies for the purpose of winning an election from policies for running the country, it is better for them and for the country that they do not work in the government.
Quite a few scholars took part in the Roh administration, but they only revealed their lack of skills in running state affairs.

*The writer is a professor of economics at Chung-Ang University. Translation by the JoongAng Daily staff.

by Ahn Kook-shin