In economics, focus is on jobs, welfare
Park’s commitment to stimulating Asia’s fourth-largest economy is reflected in her government reorganization plan.
She is reviving the abandoned post of deputy prime minister in charge of the economy as a so-called control tower for the government’s overall economic policy direction and is creating a Ministry of Future Planning and Science, which will focus on the country’s future strategies and new areas to boost economic growth.
Park said until now Korean economy has focused on following advanced countries in terms of the products and industries it pursues. She said it should break away from the following of the past and lead the global economy as a front-runner.
“[Korean exporters] are caught between a weakening Japanese yen and Chinese companies that are chasing their products at breakneck speed,” Park said in a meeting with exporters at the Korea International Trade Association on Wednesday. “To come out of this crisis in victory, I believe the paradigm of economic development should change. I have set the idea of a creative economy as a key part of my agenda because I believe it is difficult to tackle the crisis through the past growth model. I will create new growth engines based on science, technology and creativity and create new markets and new jobs.”
Boosting the work force
While Park’s predecessor Lee Myung-bak focused on boosting the economic growth rate, Park aims to raise the employment-to-population ratio to 70 percent from 59.4 percent in 2012.
The Bank of Korea has revised downward its estimate of the country’s economic growth for this year to 2.8 percent from 3.2 percent.
Park will focus on creating an innovative economy looking for opportunities in the convergence of information and communications technology and science.
To raise employment opportunities for people fresh out of college, the government will introduce an index that measures the job creation performance of conglomerates, state-run institutions and regional governments. It will evaluate and compare the quality and quantity of jobs, salary levels and recruitment process, hoping to encourage those sectors to hire more.
Recent statistics by Statistics Korea showed the number of people in their 20s and 30s who managed to find jobs in January reached a 30-year low.
The number of people in their 20s who found work was 3.53 million, down 106,000 from a year earlier, while the number for people in their 30s dropped 26,000 to 5.68 million.
The previous low for people in their 20s was 3.51 million in 1983.
The unemployment rate for people aged 15 to 29 was 7.5 percent, unchanged from the previous month and the highest since last June’s 7.7 percent.
To help small companies to grow to medium-size and larger, Park’s government will gradually scale back 160 tax incentives and programs provided to small businesses. They actually prevented companies from growing because they didn’t want to lose the benefits.
It will expand the state financial support programs for SMEs’ R&D projects to bring Korean SMEs’ technology competitiveness up to 90 percent of SMEs in developed countries. It also hopes to raise their productivity to 60 percent of conglomerates.
To encourage the birth of dynamic start-up companies, the government will adopt Israel’s Yozma (Hebrew for “initiative”) model under which the Israeli government in 1993 promised to match foreign venture capital investments in the country to boost venture capital investments in Korea.
Tackling household debts
An 18 trillion won ($16.6 billion) “happiness fund” will be created between March and April to assume some mortgage debt of homeowners badly affected by a sluggish economy and frozen real estate market.
It aims to write off a maximum of 70 percent of low-income households’ debts and up to 50 percent of ordinary income household debts for homeowners who can’t pay.
The government will tap financial resources of the Korea Asset Management Corporation to finance the fund.
To help people who are “house poor,” who spend most of their income on paying off the mortgage but can’t sell because their properties are worth less in the market than they owe, the government will introduce a policy that the Ministry of Land and Transportation buy up to 50 percent of the stakes in homes.
“These measures are a part of the government’s targeted welfare programs which aim to help people stand on their own feet by easing their burdens,” said an official at the Park’s presidential transition committee.
Market observers said Park wants to resolve the mounting household debt problem because it could be a major drag on economic growth.
The Bank of Korea said Korea is heading toward 1,000 trillion won in household debt. The country’s household debt stood a record 959.4 trillion won in 2012, up 47.6 trillion won from the previous year.
Starting from July 2014, the Park administration will expand welfare to all seniors over 65 paying them monthly allowances of 40,000 won to 200,000 won depending on their income and whether or not they are in the National Pension Service.
Last month, Park’s transition team proposed funding those payments partially through National Pension Service but backpedaled after a furious public backlash, especially from the younger generation. Now it says it will fund the payments entirely through taxes.
The government also aims to cover 100 percent of medical costs for four major diseases - cancer, heart disease, brain disorders and rare diseases - through medical insurance from 2016, initially covering 88 percent this year.
The Park government will allow health insurance to cover dental implant surgery for senior citizen over 75 from 2014 and expand that to 70-year-olds from 2015 and 65-year-olds from 2016.
While Park’s government has calculated that the new welfare policies will cost 135 trillion won over five years, critics said it will be more, and they question how the government will afford it. It hasn’t yet provided specifics.
Some critics say Park’s welfare policies could ultimately undermine the government’s overall fiscal soundness.
Park’s government said it will earn more revenues by legalizing parts of the underground economy, cracking down on tax evaders and making government spending more efficient. Critics say the government will inevitably need to raise the income tax and consumption taxes or issue bonds. More specifics on how the administration will pay for welfare will be unveiled after it takes office.
Park said in January there will be no tax hikes.
What experts think
Experts said the new government must find new growth engines.
“Korea is growing way below potential,” said Greg Fager, director of the Asia-Pacific department at the Institute of International Finance in Washington. “They really need real tax reform, stimulating tax breaks. Korea is not going to grow at its potential for longer than a quarter or two by building more cars and TVs. China is becoming competition, not a destination. It will have to develop the service sector. To develop as an off-shore financial center, they need to get the government out of running the banks.”
Fager also warned of real risks with credit card debt.
“Park’s idea of leading the global economy rather than following advanced countries will produce a virtuous cycle of growth, job creation and welfare,” said Lee Joon-hyup, a research fellow at the Hyundai Economic Research Institute. “This would help the country enter a new economic system where efficiency and fairness coexist. But clearing household debts could create a moral hazard. In the worst case scenario, loan delinquency ratios could go up as the scheme may give the impression to heavy debtors that the government will clear their debts again in the future and that they don’t have to work hard to pay them back.”
The Samsung Economic Research Institute said Park must hammer out measures reflecting economic policies adopted by major advanced countries including the U.S., Japan and China where new leaders have taken office.
“The Korean government must strengthen foreign exchange soundness and bolster its capability of handling possible trade disputes as major advanced economies are pushing for economic policies at the expense of their countries,” said Jeong Young-sik, a researcher at SERI. “It should come up with measures by assessing risks and opportunities from the other governments’ economic policies. ”
By Kim Mi-ju [email@example.com]
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