Stabilizing prices the right way

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Stabilizing prices the right way

In the final year of his five-year term, President Lee Myung-bak has put taming inflation at the top of his to-do list. In his New Year’s address and speech on governance, he declared that he will do everything in his power to bring inflation, which is currently hovering just above 4 percent, down to around 3 percent. At a cabinet meeting, Lee ordered government officials to keep a close eye on and manage the prices of individual consumer items.

However, his words offer little comfort and assurance to consumers. His administration has made the same promise every year since 2008, but inflation still crept past the target set at the beginning of the year in 2011. The government rushed to clamp down on the prices of gasoline and fresh vegetables, as well as telecommunication charges, but such random interference only distorted and disrupted the market.

Lee needs to refer to past lessons. During the 1980s, President Chun Doo Hwan prioritized consumer prices over economic growth and implemented radical liberalization and opening-up measures. His government did not interfere with consumer prices, however, choosing instead to promote fair competition. This led companies to cut costs and improve quality, and prices began to drop over time. Helped by the this, the economy was able to gallop ahead in the late 1980s.

Inflation today cannot be tamed by the kind of authoritative measures common in underdeveloped economies. It is the central bank, not the government, that must shoulder the burden, but it could jeopardize the local economy and financial market if it temporizes too long. The Bank of Korea must demonstrate flexibility in its monetary policy to stave off inflationary pressure and speculation. It has already seen household debt balloon due to its poorly timed monetary policies.

At the same time, Seoul must ignore the temptation to interfere in the currency market to help exporters. Its policy of deliberately weakening the won due to hikes in the price of international raw materials only fanned the cost of imports.

The government needs to be consistent, realize that inflation cannot be reined in by force, and promote liberalization instead. It should do away with market barriers and expose the economy to global competition. The distribution structure should also be revamped and anti-trade practices eliminated. Without such fundamental actions, promises to stabilize consumer prices will be no more than political rhetoric.
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