[Seri column]Blue skies ahead

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[Seri column]Blue skies ahead

President-elect Lee Myung-bak takes office in a month, riding in on high expectations of an economic renaissance. His overwhelming victory gives him a mandate to undo the policies of the Roh Moo-hyun administration, now derisively labeled “NATO” (No Action, Talking Only).
Unfortunately, the promised shift to a growth-oriented, business-friendly environment will start in less-than-ideal conditions. Considering the daily drumbeat of grim news about the global financial markets and mounting evidence that the economy of the United States, Korea’s No. 2 trading partner, is barrelling into a recession, Lee will be taking over in gale-force winds, with fears of worsening conditions. Lee’s staff has already dialed down this year’s growth rate goal to 6 percent. That has emboldened the people who question Lee’s overarching “747” economic pledge ― 7 percent growth, a national per capita income of $40,000 and the seventh-largest economy in the world ― for his five-year term of office. However, if the measures in Lee’s economic agenda deliver, as promised, the 7 percent annual growth is attainable.
Deregulation, tax cuts and knowledge-based industries are pillars of Lee Myung-bak; or MB-nomics. Deregulation and tax cuts should help spur investment and consumption by households and the business sector, key areas that have been lackluster during the Roh years, making the economy overly dependent on exports. Meanwhile, knowledge-based industries, such as convergence information technology, which combines nanotechnology and biotechnology with IT, expect to raise the efficiency and productivity of Korea’s economy, which will also expand the size of the economy. The MB-nomics package will address both sides of the economy, supply and demand. The incoming government pledges to remove regulations that hinder business investment and also reduce the corporate tax rate to 10 to 20 percent from the current 13 to 25 percent.
Increases in investment, especially in the facilities sector, is the easiest and fastest way to expand the GDP, thus bolstering the supply side of the economy. The increased investment will also help invigorate aggregate demand. That, in turn, will lift the economy to the upper level of its potential growth.
In particular, lifting regulations that prohibit business investment in the Seoul metropolitan area and limiting the stakes held among companies will have tangible effects on small and medium-sized enterprises and conglomerates.
The Roh administration made a noble effort to push for more balanced development nationwide. However, it became clear that many companies have decided just to sit on their burgeoning reserves rather than be coaxed into expanding outside the Seoul area.
The deregulation of investments in other companies will cause injections of capital into small and medium-sized firms by large companies seeking partners to develop new growth engines.
The Lee transition team is considering a tax break on investments by large companies into the non-voting shares of smaller firms. Boosting investment activity in that sphere will help realize a major goal of MB-nomics, ramping up innovation in the smaller and midsize firms to help promote growth and create jobs.
Another offshoot of the deregulation of intra-company investments will be strategic flexibility. A local firm could bid on one of the many state-owned companies, including financial institutions, ticketed for privatization by the Lee administration. Expect to see the “Big Bang” of the financial industry, in which conventional boundaries of services among banks, brokerages and insurers will be opened up, starting in 2009. Mergers and acquisitions will increase, and companies with deep pockets will likely be interested in bidding independently or forming a consortium.
Tax cuts for households and individuals obviously will improve the consumer sentiment and lubricate private spending. The announced cuts include property tax cuts, which will provide relief to owners who wanted to sell their homes to raise capital but were dissuaded by onerous taxes targeting speculators.
In a nutshell, if deregulation and tax cuts help increase total investments by 5 percentage points and consumption by 2 percentage points above recent levels, the annual growth rate could rise at least 1.5 percentage points.
The knowledge-based technology industry will seek new engines for economic growth. With the steady growth of domestic demand caused by tax cuts and deregulation, the environment, medical and pharmaceutical industries will gain growth momentum as strategic industries that can reshape the nation’s economy. Dependency on heavy industries such as shipbuilding, automobiles and construction obviously need to be tempered given the increasing global competition.
If knowledge-based industries play a major role in exports, we could have growth of at least 0.8 percentage point in shipments. That is because they need less imports of raw materials than traditional manufacturing sectors, so the contribution produces a net increase in exports.
Considering the challenges to the global economy and opposition to various reforms by liberals and entrenched bureaucrats, no one should expect the first year of the Lee administration to produce an astounding leap in positive economic indicators. However, it is safe to say that 2008 will be a transition period for a renaissance that will swing Korea’s economic pendulum toward 7 percent growth.

*The writer is a research fellow at Samsung Economic Research Institute (www.seriworld.org). Inquiries on this article should be addressed to jaechul.chang@samsung.com.

by Chang Jae-chul
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