Actions before wordsLast weekend, President Lee Myung-bak said, “Stabilizing inflation is more urgent than economic growth.” Three days later, Bank of Korea Governor Lee Seong-tae said, “The local currency hit its short-term bottom when it fell to 1,030 won per dollar.” In the evening of the same day, Finance Minister Kang Man-soo said, “The difference between the benchmark interest rate between South Korea and the United States amounted to 2.75 percentage points.”
Foreign exchange and financial markets naturally fluctuate according to comments such as these. The won-dollar exchange rate rose and fell by 20 won after the above comments were made.
This means, in effect, that the policy makers who are supposed to be stabilizing the market have destabilized it.
Of course, it is possible that government agencies are split over the issue. It is understandable that the Finance Ministry is growth-oriented and the central bank is worried about inflation. But foreign exchange rates, interest rates and stock prices are very sensitive economic variables. Policy makers should not refer to specific numbers when they make comments. It is best for them to make only vague comments about the direction of their policies.
The confusion among government agencies that was instigated by President Lee’s transition committee has not been cleared up, even after the new administration was launched. The Justice Ministry and the Financial Services Commission have been squaring off over the introduction of poison pills, a strategy used to discourage hostile takeovers. The Finance Ministry and the Health and Welfare Ministry have different thoughts about the plan to boost the private medical insurance industry.
It is better for the ministries and government agencies to announce important government policies after they have thoroughly discussed them with each other.
President Lee’s administration was founded on pragmatism and pro-business policies. When economic conditions are bad, it is more important to gain the trust of the market. The administration has to maintain consistency with policies that it has already announced, and let the market set foreign exchange rates or interest rates.
Only a month has passed, but the new administration spoke before it took action. If the administration continues to confuse its policies, it will be no different from the last administration, which was criticized for its lack of professionalism.