[Viewpoint] Watch the warning signsIf the European debt crisis takes a toll on the local economy and cripples it, much of the blame will go to President Lee Myung-bak, Minister of Strategy and Finance Bahk Jae-wan and Bank of Korea Gov. Kim Choong-soo. The president should be accountable for keeping unfit captains at the helm in precarious weather and Bahk and Kim for messing up the macroeconomic policy. Macroeconomic policy employs three key instruments: public finance, interest rates and foreign exchange rates.
Bahk, too, obsessed with a balanced budget, disabled his big guns: finances and currency. He neglected to take pre-emptive action and come up with impetus to stimulate the slowing economy. He took a slowdown for granted and sat comfortably in the back seat. The central bank chief more or less wasted monetary tools by sitting on interest rates. If you ask me, the two are not qualified for their jobs.
Through my opinion page, I have repeatedly urged authorities to revitalize fiscal policy, breaking out of the fetters of a balanced budget dogma to actively address the household debt problem and stimulate domestic consumption and the services sector to drive the economy on two engines along with exports and the manufacturing sector.
My reason was that the European debt crisis was expected to drag on. The euro zone may not go so far as collapsing, but the Continent will likely be mired in a slump for a long time. The financial repercussions will be enormous, but the bigger problem is their effect on our economy. A financial crisis leads to economic stagnation.
Moreover, the Korean economy evidently showed signs of its limitations from having a sole growth engine in exports and industrial activity. The economy has been dogged with an unprecedented moderate growth rate of 3 percent for a second consecutive year. It is important to avoid immediate dangers, but what is more demanding is a longer perspective and preparations to create new growth engines and strengthen our economic potential. Fiscal policy plays a crucial role in moderating the pace of economic movement in the short-term and revamping the industrial structure to create new potential for sustainable growth in the longer run.
It is a textbook theory, but the president and his top economic and financial aides kept emphasizing a balanced budget. They turned a blind eye to the immediate financial dangers and the stumbling pace of growth. They blamed external factors for the Korea’s slowed growth, implying they are unlikely to depart from their current fiscal and monetary position.
The Korean economy has always been vulnerable to external variables. The country’s economic reliance on trade is as much as 110 percent, which means the local economy more or less moves in sync with the global economy. There would be no need to change anything in the belief that the economy runs entirely on external factors and authorities can dump any blame on the world outside.
The sense of complacency and absence of vigilance, due to overconfidence that the country has a built resilience and won’t likely be greatly affected by the European crisis, also has led to policy inertia. Focus has been restricted to the financial markets. Few considered the fiscal alternatives. Household debt exceeds 900 trillion won ($774 billion), but actually tops 1,000 trillion won when including 100 trillion won in debt held by self-employed individuals.
The Bank of Korea also warned that household debt could trigger an economic crisis if it is coupled with an external shock. Authorities must examine fiscal alternatives to buffer any shock to the financial sector in case household debt spills over. The government should at least study ways to help self-employed borrowers. It is part of the government’s role to foresee signs of dangers and ring-fence the economy.
But the government has tied its hands on fiscal policy due to a near-sacred dogma of keeping its budget in a benign state. The Ministry of Strategy and Finance has no purpose with such narrow fiscal maneuvering. It should pay heed to recent congressional testimony by Federal Reserve Chairman Ben Bernanke in which he emphasized the importance of the fiscal role in preventing unnecessary blockages to economic recovery. The objective of fiscal policy is to “promote a stronger economy in the medium and long term … Although we cannot expect our economy to grow its way out of federal budget imbalances without significant adjustment in fiscal policies, a more productive economy will ease the tradeoffs faced by fiscal policy makers,” he said.
*The author is an editorial writer of the JoongAng Ilbo.
By Kim Yeong-ook