[Viewpoint] Caution needed on exit strategy

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[Viewpoint] Caution needed on exit strategy

Exit strategies are ubiquitous these days. Washington is deliberating an exit strategy for pulling out American troops from Iraq after the elections there. Korean politicians apply the term “exit strategy” to refer to a way to refocus public attention on issues other than the Sejong City legislation.

An exit strategy was originally a military withdrawal to minimize human and material losses in a conflict zone. The term was conveniently employed to describe the discontinuance of stimulus packages that had been used to assist the economy facing down the worldwide financial crisis.

Such an exit plan generally refers to an end to the expansionary fiscal policies, including low-interest and loose monetary policy. When and how a government tightens spending and a central bank raises interest rates stirs immense attention because of the sweeping and pivotal impact the policies would have on the real economy and financial markets.

An exit policy usually generates heated debate over its the timing and breadth. Those supporting an early exit argue that a quick departure from fiscal and monetary stimulus policies is necessary to fend off fallout from rising asset prices and other inflationary pressure. Advocates of this approach mostly work in academia and think tanks. Moderates say the economy has only recently been taken off life support and that any hasty measure could choke off the fragile recovery. People on this side of the argument are mostly in the government.

Uncertainty and unrest still weigh on the global financial environment. Nobody can be sure how long the nascent recovery will last. But it is also a fact that pressure fanning prices is looming. Authorities find themselves in a quandary, trying to decide when and how to order a shift in macroeconomic and financial policy.

A pullout from the current supportive policy would cause extensive and immediate repercussions to a large population. Less government spending will mean less work for contractors. Higher interest rates would be a burden on households.

An economic strategy decision is now subject to delicate political maneuvering with policy makers weighing the interests of various parties. Few authorities seem to realize that they need to submit the politically-charged exit strategy to a scientific examination. Even the central bank governor who is authorized with sovereignty to make a monetary policy appears to be wavering.

None among the financial authorities is willing to speak up and few appear to be seriously contemplating the state of the Korean economy after it moves away from its current policy.

I personally believe current talk of an exit plan is premature and half-baked. Fiscal tightening and rate hikes would certainly lead to an exit, but no one is sure what awaits the economy on the other side of the door.

The government had considered a tax reduction to bolster growth before the economy overcame the global financial crisis. Tax cuts are aimed at expanding corporate investment while reducing the public role to support a self-sustainable economy. The policy can be effective in a longer run. It remains unclear whether the government will opt for a tax cut or improve fiscal balance after the exit strategy is adopted.

The exodus of foreign capital had posed a fundamental threat to the economy amid global economic turbulence. The economy swayed so much that the specter of the 1997 financial crisis raised its ugly head.

Foreign capital has returned to the Korean markets, betting on a rosier outlook and stronger currency.

But what if these funds suddenly pack up and leave again? Do the authorities have a solid, credible plan?

Before the global economic troubles interrupted us, we had been contemplating how to create a sustainable economy that generates new investments and jobs.

We had planned to cut unnecessary red tape, make the labor market more flexible, and enhance the competitiveness and effectiveness of the financial industry. Will we be able to continue these pursuits if the economy takes another hard hit after stimulus measures are scaled back early?

The current debate on an exit strategy centers on bringing the economy to the door.

Before opening it, we must know if the world out there is safe.

*The writer is a professor of economics at Sungshin Women’s University.
Translation by the JoongAng Daily staff.

by Kang Suk-hoon
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