[Viewpoint] Learn from our past successWhen Korea was going through the financial crisis in 1998, Brazil was experiencing a groundbreaking political event unprecedented in the 109 years since it became a republic. Fernando Henrique Cardoso of the Brazilian Social Democracy Party became the first Brazilian president to be re-elected for a second term. In a country where a president who completes his term is rare, this first re-election was a significant event. Analysts said that Brazilian citizens were panicked over the financial crisis and had chosen political stability.
However, Cardoso’s glory stops there. Before the fanfare could be played to celebrate his election victory, the financial crisis struck Brazil.
In a time of crisis, how a state has managed its finances in normal times matters. If it has been frugal, it can manage to get some loans. However, if it has been extravagant, it will be under more pressure.
And that was the case with Brazil. The government wanted to release money to bolster the economy, but the treasury was nearly empty. Various welfare expenses and careless fiscal management turned out to be a burden. The fiscal deficit reached 7.8 percent of the gross domestic product, so Brazil could not afford to borrow any more. In the end, Brazil’s economy shrank 1.95 percent in 1998. In 1999, economic growth was 2.25 percent, but the pain did not go away, and growth fell to negative 0.7 percent in 2001.
Meanwhile, Korea was in a different situation. While Brazil was living an economic nightmare, new sprouts began to spring up in the Korean economy thanks to government spending.
Korea’s treasury had been solid with a series of surpluses since 1993. This healthy structure served as a stout pillar when the country was hit with the Asian financial crisis. Korea could afford to borrow from other countries to release money onto the market.
In 1998 and 1999, the government drew up supplementary budgets worth 25.18 trillion won ($17.5 billion). As the market became flush with more money, jobs were created, which led to increased incomes. As consumption rose, investment expanded. In 1998, economic growth marked a negative 6.9 percent, but it jumped to 9.5 percent in 1999. While Korea and Brazil both went through financial crises, the two countries had completely different experiences.
Having struggled to overcome the financial crisis, the Cardoso administration was crushed by Luiz Inacio Lula da Silva’s Workers’ Party in the presidential election in 2002.
As Korea is hit with yet another financial crisis, the government and the ruling party are discussing the country’s largest supplementary budget in 11 years. It seems that we have a consensus on drawing up a supplementary budget.
However, discussion of the supplementary budget is being approached from strange angles. It seems that everyone is focusing on the scale of the budget. Proponents of a super-sized budget suggest a supplementary budget of over 30 trillion won, while opponents argue that borrowing trillions of dollars would ruin the national economy. While the attention is on the size of the budget, what’s really important is not how big the budget is but how the money is used. Korea’s public debt-to-GDP ratio is 32.9 percent, far lower than Japan’s 217 percent and 81.3 percent for the United States. This means that Korea could still release money without worrying about having too much debt.
However, no matter how much money we have, the money could be wasted if we don’t know how to use it well. Japan wasted a large fortune paving roads and building bridges in the 1990s.
Fortunately, we have experience spending money wisely. During the 1990s financial crisis, money used to restructure small and midsized businesses, promote exports and reinvigorate the domestic economy flew all the way to the capillary vessels of the economy, and Korea enjoyed a budget surplus in 2000. As the economy revived, individual and corporate incomes increased, which translated into bigger tax collection.
The supplementary budget this time should take the best examples from this experience. We need to make sure we will be able to make more money by spending it wisely now. The market will repeatedly alternate between prosperity and slump. When we spend money with an eye on the future, we will be able to move up to a brisk economy and get ready for yet another slump. The government should consider organizing a special task force made up of government, academia and research institutes to oversee how the budget is used.
Public sentiment is grim. The supplementary budget is a good opportunity for the Lee Myung-bak administration to bring about a turning point in this economic crisis.
*The writer is a deputy economic news editor of the JoongAng Ilbo.
by Kim Jong-yoon