[Viewpoint] The economy’s dangerous path

The formation and management of state entities and administrative bodies were shaped through Korea’s past, as well as paying attention to the histories of advanced countries. Based on those histories, the tenure of the heads of institutions that need to be independent from politics and the administration for the purpose of long-term goals formed an agreement.

That has been done to ensure the nation’s development and its sustainable growth. The central bank, financial watchdogs and fair trade authorities are such institutions. For them to perform their roles properly, authority and trust, built through time, are critical. And with them, they become important assets of our country.

The Lee Myung-bak administration, however, seems to believe there is a better way of managing the country.

With the revision of the law governing the Bank of Korea in 1998, the central bank’s independence has strengthened and the independence of monetary policy has been established. But that principle was not respected in this administration.

After exerting pressure to maintain low interest rates, the president and government ministries feel they are the ones who will have to ensure price stabilization, although that is obviously the most important role of the central bank.

Financial supervisory authorities can be respected when they consistently use preemptive actions to guard against dangerous expansion of debt and overly aggressive growth by companies. For an insolvent company, restructuring through public assistance or bankruptcy is the right path.

However, the financial authorities, which forced banks to extend loans and to take over unhealthy banks, are unlikely to supervise them properly afterward. Because the Fair Trade Commission has become indebted to companies for its strategy of price management, it can hardly use its authority to enforce order in the market for the purposes of fair trade, which is its reason for being.

Instead of supervision and order, deals take place. When insolvencies grow and the market is shaken, the commission resorts to stop-gap measures, and when problems grow, a serious crisis emerges. Because of such a strategy in the 1970s and 1980s, the country was pitched into the foreign exchange crisis at the end of the 1990s and paid enormous consequences.

The heads of the central bank, the financial supervisory authority and fair trade body easily make enemies in the boardrooms and the political arena. They have to call an end to the party when everyone is enjoying it.

It’s not an easy job. But when they fail in it, the seeds of crisis grow under what appeared to be a healthy economy, and companies, using their power to undermine fair competition and the dynamism of the market.

That will backfire on the national economy and the people in the future. Therefore, the state is responsible for understanding and protecting the heads of the central bank, financial watchdog and anti-trust body.

The Korean economy has seen the fastest recovery among the OECD countries from the latest global crisis because of the government’s quick response, as well as outside factors. Without the weak won, which supported export competitiveness, and the continued rapid growth of the Chinese economy, it would have been difficult for Korea to see such a great performance.

On the flip side, there has been pressure for banks to extend loans by maintaining the super low interest rates and by expanding credit guarantees, despite the most expansionary fiscal policy among the OECD nations, not to mention the questionable financial health of small companies and households.

Much of this was unavoidable during the crisis, but the government still needs to right the economy’s fundamentals rather than using micro policy.

Ministries are supposed to worry about inflation during a campaign for growth. Such a strategy may work for a few years. But prices will eventually jump, and borrowed growth will only collapse faster in any future recession.

We have to accept that our growth will decline when the currency and China factors disappear. There are no freebies in economics. Restraining the mushrooming of household debt and encouraging the restructuring of uncompetitive small companies, insolvent construction firms and unhealthy savings banks to improve the overall health of the economy are the imminent tasks of the government.

If the government continues its current policy, the seeds of crisis will bloom. When a crisis or a recession arrives, the working-class is always the most vulnerable of all. If the government really wants to implement working-class-friendly policies, it must choose a course of stable growth so that the lower income bracket won’t have to pay the price in a crisis fuelled by the current strategy.

Despite the latest global financial meltdown, the Korean economy has maintained its vigor because it paid a tremendous expense after the 1997 foreign exchange crisis to restructure its unhealthy companies and banks while maintaining policies to respect the market. Come to think of it, our policies and our system have gone back to the days before that crisis.

*The writer is a professor of Graduate School of International Studies, Sogang University.

By Cho Yoon-je