Avoiding Japan’s mistakes

The Korea Development Institute, a state-run think tank, is engaged in a meaningful project. It is researching Japan’s two lost decades to draw lessons for Korea. Since its asset bubble burst at the end of the 1980s, Japan has spend an astronomical amount on public finances yet failed to stop or reverse deflation and stagnation.

According to the KDI study, 53 percent of Japan’s fiscal spending has been in pork-barrel projects like roads, ports and airports. Investment in information and technology and railway infrastructure stopped at 10 percent. The marginal productivity - or the level of effect from input against output - from Japan’s roads, airports, and ports reached just one fifth of the yield from IT and railroad investments.

Still, Japan carried on with the heavy pork-barrel spending, regardless of its limited effect, for political purposes and selfish regional interests, which did little to help the economy or raise overall economic output. We are no better in our spending choices. Airports in local areas are mostly empty, and our highways are among the longest out of the Organization of Economic Cooperation and Development nations. The government and politicians still habitually dole out to the pork-barrel projects.

Spending should be based on thorough studies of productivity. We must not mimic Japan in randomly throwing cash around and should instead come up with a customized fiscal policy. People in their 30s and 40s are the primary working and spending population. But their incomes have been on a plateau since 2008 and mostly go to paying mortgages, runaway rents or private tutoring for children. The government is right to set a direction to vitalize the services sector and reorient the economy toward domestic demand. But unless consumers open up their wallets, endeavors to boost domestic demand will fail.

Resources must be allocated more rationally based on marginal productivity. Capital returns from IT and research and development are much higher than investment in infrastructure projects. Public investment in software has been slow. Investments in education and technology take a long time to generate tangible output but are nevertheless more meaningful. To revive economic activities, public policies should be focused on the 30 to 40 age group. They must be supported with more accessible housing through public rental units to ease their financial burdens. Public education must be strengthened in order to reduce spending on private tutoring. When people in these generations began to work and spend with more enthusiasm, the overall economy will gain traction.

JoongAng Ilbo, April 4, Page 34