Avoiding Europe’s mistakes

The deepening economic crisis is creating social fissures and political turmoil around the world. We are no exception, and the poor and underprivileged are feeling the lashes of a prolonged downturn. An urgency about economics has dominated the presidential election campaign, which is taking place at such a critical time. But sweet talks and rosy welfare promises litter the campaign trail instead of persuasive and serious debate and ideas to concretely overcome the crisis.

Former government officials and veteran economists with experience in policy making and brainstorming during the country’s transitional period in industrialization and democracy over the last half-a-century have stepped up to add wisdom and insight in finding solutions to these problems. The Korea Forum for Progress led by former Prime Minister Nam Duck-woo and a forum on healthy public finances launched by former Deputy Prime Minister Kang Kyong-shik and former Minister of Finance and Economy Kang Bong-kyun offered diagnoses and prescriptions for various problems that demand attention and consideration from presidential candidates and their policy planners.

Speaking from their experience and expertise, the veteran bureaucrats all emphasized the importance of fiscal integrity. To stimulate the economy and pull the economy out of its slowdown as well as reinforce social welfare, the government needs to raise taxes or cut spending.

But few among the common folk, who are barely muddling through, would be willing to agree to tax increases at this time. In that case, where would the financing come from for new welfare programs? Issuing new government bonds would be easy, but we have seen the messy end of that game with European countries on the brink of bankruptcy due to their debt-financed profligacy.

When times are tough, the government must be more careful with its management of public finances. Former Deputy Prime Minister Kang Kyong-shik warned that strong government finance metrics are a country’s last resort. Former Prime Minister Nam also pointed out that fiscal integrity and economic equality are not incompatible and that the so-called economic democratization we hear about so much these days is a piece of guidance from the Constitution but not necessarily an answer to economic crisis.

Economic democratization has become a campaign buzzword from both the ruling and opposition camps due to a growing consensus that imbalances of political power and economic wealth have created unacceptable inequalities in our society. Former minister Kang pointed out that young people have lost hope in finding a better future because of a basic unfairness in the country’s rules of competition. Politicians are zeroing in on the chaebol as the key to economic democratization because they symbolize unfair competition in Korea. But the presidential candidates have not fully explained why they want to restructure the chaebol before, say, reforming political parties, the legislature and government. Establishing a fair economic system would be the fastest and most effective way to put a stop to the cascade of half-baked populist campaign promises.

The two seminars concluded that Korea’s structural weaknesses have caused today’s economic woes as much as the global slowdown, and that radical restructuring is a must in order to fight off the crisis. Decisions on when and how to implement the restructuring and what to prioritize on the to-do list is, of course, a political decision.

That is why it is important to set guidelines on fiscal discipline and eschew the temptation of driving up a lot of easy debt to resolve problems. Keeping a balanced budget is as important to the state as to corporations and households because if the government spends more than it can afford, it would risk political unrest.

Because public support feeds power in a democracy, where all power comes from the people, policy makers and politicians are tempted to win favor through populist policies. Spain, Portugal and Greece with their democratic transitions in the mid-1970s, helped inspire the democracy movement in South Korea in 1987. Our democracy role models are now in economic, social and political crises. We shouldn’t follow their lead.

The test and challenges democratic nations face include balancing economic growth and social welfare through spending and tax policies that do not risk fiscal deficits or the loss of public support. What is particularly tricky is persuading the public of the need for austerity and sacrifice in times of downturn. Playing a blame game to deceive the public and resorting to sensational nationalism cannot win public favor or ensure a stable balance.

Without consistent and sincere efforts to persuade and win the trust of the people through transparency and responsibility and demonstrations of compromise and dialogue in politics, we cannot expect to sustain our democracy based on a solid fiscal base. We should take the momentum of the presidential election to contemplate hard on the direction of our society to avoid becoming a deficit-ridden nation.

* The author is former prime minister and adviser to the JoongAng Ilbo.

by Lee Hong-koo