Time for stimuli

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Time for stimuli

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Kim Yeong-ook

A big sag in private consumption was Korea’s economic problem in 2005 as well. People criticized what the Roh Moo-hyun administration was doing. In August of that year, the Blue House explained that private consumption was stagnant, but said that was an outcome of reforms. The sex trade ban and reduced entertainment expenses were having an impact on private spending. In the past, this kind of spending was one of the sources that boosted the domestic economy, and it was unreasonable to allow “dirty money” to revitalize domestic consumption.

I am not mentioning this precedent because the Blue House was wrong. The explanation was, indeed, reasonable. I want to point out that slow consumption was also a serious problem for the country a decade ago. But if the government neglects the problem, slack consumption can become a chronic condition of the Korean economy.

When it comes to private consumption, Korea’s economy is going through “a lost decade.” Since 2003, the rate of increase in private consumption spending was higher than the rate of GDP growth only once, in 2005. Private consumption accounted for 49 percent of GDP last year, a sharp decline from 57 percent in 2002. Until recently, the Sewol ferry incident was considered the cause of our current sag. Consumption was recovering before the tragic accident, but then slowed down, people argued. But if the Sewol ferry tragedy was indeed the cause, consumption should be going up by now. But that’s not happening. Our new economic team constantly advocates market boosting measures.

It’s hard to deny that something is seriously wrong with our economy.

Slack consumption lowers economic growth. But that’s not all. A more serious problem is amplification of uncertainty and discontent among the people. Consumption is an indicator of quality of life. Anemic consumption is a proof that people’s livelihoods are not improving. It is only natural that people grow discontented and anxious if their life don’t improving for more than 10 years. That’s how an economy goes into a tailspin.

There is no clear solution. There are many reasons why people don’t spend. Household income is not increasing, and the population is growing older and people are uncertain in their senior years. The stock market and real estate market are in slumps. Household debts are enormous, layoffs have become common, and non-salaried jobs are becoming normal. Companies are operating conservatively. Slow consumption is an aggregation of all the structural problems of the Korean economy, so it is a true challenge.

Meanwhile, a vicious cycle has begun. Companies are suffering from low growth leading to reduced investments and conservative business strategies such as cutting down on work forces. The real estate and stock markets are caught in a cycle of slump.

That’s why we need to overhaul the economic system completely. It will take a long time, and we don’t know if the reforms will be effective or when the outcome will show. Moreover, it may not be a problem with the system. It could be the “magneto trouble,” an issue with the electric generator of an automobile engine that John Maynard Keynes pointed out during the Great Depression. Rather than structural reform, consumption can be boosted through aggressive financial and currency policies. Even if it is a structural problem, we cannot give up there.

If we need to do something, it should begin with recovering the lost confidence of the people. In this column in the April 26, 2013 issue, I urged Korea to “learn from Japan.” The fruits of so-called Abenomics are yet to be seen. But Japan successfully rekindled some public confidence, and the magneto of the Japanese economy has been ignited.

That’s what we need to do, too. We have to regain the confidence that we can do it. Market boosting signals need to be clear and consistent. They should not be ambiguous. Instead of roundabout measures such as targeting reserve assets, the authorities need to use straightforward financial and currency policies. This is no time to be passive because of the government’s debt. The interest rate should be lowered beyond the expectations of the market. The financial authorities need to also positively consider quantitative easing, which the market is not anticipating. The Bank of Korea should sell short-term bonds and buy long-term bonds. This could lead to side effects, and all of the consequences are not clear. But it is a necessary move. If we don’t recover confidence now, we will suffer a real lost decade. JoongAng Ilbo, July 24, Page 28

* The author is a senior advisor of the Korea Institute of Finance.

BY Kim Yeong-ook

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