[Viewpoint] New economic system needed

The world stands at a major turning point.

Capitalism faces the most serious challenges to its existence, and the world economy is in its deepest recession since the Great Depression.

As ever-expanding government intervention in the markets is already a fact of life, the centers of market capitalism - such as Britain and the United States - are underpinned by the role of government. Communist Party-led China, meanwhile, is taking strong government-led strategies for economic development and is rapidly emerging as a political and economic giant.

It’s also leading the way, comparable to the United States, during this global economic downturn. There’s a growing number of developing countries following economic development policies derived from Chinese experience, a “Beijing consensus” rather than a “Washington consensus.”

Capitalism and the market economic model will survive the global crisis and the current challenges over the long term because there is no other alternative to replace them in terms of encouraging creativity, motivating people to achieve goals and fostering comprehensive economic development and growth. However, history shows that capitalism is not a model designed to systematically facilitate self-development in a stable manner.

Since the end of the 19th century, Western societies have complemented the vision of the almighty power of the market by mapping out institutional devices such as antitrust laws, fair trade laws, labor laws and welfare reinforcement. Government has been expanding its functions.

In developed countries, government spending in the public sector accounted for less than 10 percent of average per capita income at the end of the 19th century and topped 20 percent prior to the outbreak of the Second World War. It then topped 40 percent in nearly all European countries after the war. This “modified economy” model helped facilitate stable economic growth for Western economies until the 1970s.

“Neoliberalism,” which began in the 1980s, prompted the United States and Britain to spur their economies and has established itself as the dominant economic model for the whole world, quickened by the fall of communism and globalization. But it has come to an impasse.

Now, the world has no choice but to explore ways to draw up a blueprint for a new economic model and global financial order, again.

Global financial markets are expected to remain stable, with economic indicators showing signs of a slight recovery. However, if countries - seeing light at the end of the tunnel - cease efforts to improve institutional defects inherent in domestic and international economies, another global economic crisis is certain.

The current recovery is rooted in several policies: unprecedented expansion of government spending, super-low interest rates and quantitative expansion of monetary policy. However, they are not fundamental solutions to the global downturn. These types of policies should not turn into ongoing measures.

The world economy still has a bigger policy-oriented task revolving around how it solves the inherent problems related to excessive personal debt, financial deficits and timely absorption of excess liquidity.

In addition, the global community faces a great challenge in improving the structural and institutional defects of the markets - the biggest culprit behind the global meltdown - build more stable financial institutions and restore global financial order.

The same may be said of Korea.

Although a variety of measures have been taken in terms of crisis recovery, we still have to resolve several issues, including how we handle our weaknesses given our exposure to a global economy and developing institutional coping capabilities.

Each turning point in history creates winners and losers.

The type of reforms and solutions being used in developed markets cannot, are not and should not be the same solutions in Korea. The assertion that we should reinforce regulation on the capital markets and lower market openness is gaining strength at home and overseas. However, I believe that the Korean economy should continue to implement its policies for expansion and globalization.

Having said that, I also believe that we need to overhaul a variety of policies and institutions to facilitate market stability and flexibility.

In addition, enhancing labor flexibility, strengthening our overall social safety net and establishing close cooperation with macroeconomic policy authorities and financial watchdogs are key steps we must take. We also need to make changes to guarantee political neutrality to achieve our goals. Above all, a sound structure for national decision-making should be implemented, and it must be structure to provide swift policy responses as issues arise.

At this historic turning point, whether Korea becomes a winner or a loser will depend on what institutions and systems we will be able to build.

*The writer is a professor of economics at Sogang University’s Graduate School of International Studies. Translation by the JoongAng Daily staff.

by Cho Yoon-je