Toward a real recovery

Shin Jang-sup

Politician turned Deputy Prime Minister for the Economy Choi Kyung-hwan has been eager and intent on reviving the economy, trotting out various measures to jumpstart sluggish domestic demand since he entered office late last month. The stock market turned buoyant and hopeful at the long-awaited enthusiastic attention to the economy. The government cried wolf many times, promising stimulus. But this time it is more believable, with an aggressive veteran politician who has the full confidence of the president at the helm. He declared he would tap uncharted waters to reinvigorate domestic demand. It is refreshing to hear strong proactive rhetoric on accelerating the slow-moving economy.

South Korea achieved its rags-to-riches miracle over a short period of time because of an unprecedented course. The country was denied a loan from the World Bank in the late 1960s when it was still recovering from the ravages of war and wanted to build a shipyard. But that country has built one of the world’s biggest steelmakers in Posco. In 1970s, the government sponsored industrialization of the heavy chemical industry and in the following decade, it silenced skeptics at home and abroad by turning a state-of-the-art semiconductor into an export mainstay.

But the Korea that awed the world with its staggering growth went astray in the 2000s. The biggest reason was it lost originality and chose to follow the paths of others. Humbled by an international bailout to avoid sovereign insolvency in late 1990s, the government and Korea Inc. dutifully obeyed the stringent restructuring guidelines of international lenders. As a result, the Korean economy became an American miniature - moving at a snail’s pace, with each household sitting on an unaffordable debt pile and no longer saving.

It is not easy to walk down the unprecedented path. Pioneering is always hard.

It is therefore crucial to set a firm goal. Then the economic team will know what it needs to do, and what policy means are in demand and how to carry them out. I advise the economic team to direct itself for a sustainable growth at medium pace, instead just getting out of the slump.

Korea still belongs to the mid-income group of nations. It is undergoing various complications because its growth pace has slowed to the level of advanced economies. It is past the stage of raking in double-digit growth, but still the economy needs to run at medium speed in order to catch up with the higher-income group. It first needs to change models for comparison and benchmarks.

Seoul usually compares various economic data and performances with the wealthy nations of the Organization for Economic Cooperation and Development. It is easier to compare and assess its standing with available data as a member of the OECD, having been convinced that it must compare and compete with advanced nations in order to become one of them.

The OECD is comprised of the largest economies. It was premature for Korea to join the group in 1994 when it had just entered the middle income category. The government readjusted its economic, financial and corporate system too fast to meet the common standards of advanced economies, liberalizing and opening when it wasn’t ready. The result was the financial crisis and international bailout in 1997. To objectively assess Korea’s status, it must be compared with economies of similar scale.

Medium speed for an OECD average standard is fast. We must not deceive and comfort ourselves that our economy is performing well compared to the OECD average. We should instead compare ourselves to the G20 economies.

A temporary rebound cannot solve the serious and structural challenges of household debt and an aging society. Korea must go on generating growth at medium speed. Corporate investment and wages need to continue rising. The textbook for growth is increased investment, hiring and then wages. Salaries can only increase when companies invest. Policies should focus on promoting corporate investment that leads to higher wages.

Investment is moved by animal instinct in entrepreneurship. Companies must be willing to take risks despite uncertainties and questionable prospects. The trickle-up effect where higher wages could help boost corporate investment is less likely to pan out in Korea than in Japan. Korea’s economy is much smaller than that of Japan and domestic demand is a smaller share of GDP. Even with increases in salaries for employees, the unions and employers must be in agreement to work together to raise productivity and revenue to keep the cycle running.

Fiscal support should continue uninterrupted until the economy shows tangible improvement. Many worry that aggressive fiscal stimuli could jeopardize the long-sustained integrity in public finances.

But as Japan has demonstrated, aggressive stimuli actions must be seen through because more harm could be done if stopped halfway. Richard Koo, the chief economist of Nomura Research Institute who has long studied the Japanese economy and coined the idea of the lost two decades in the country as a “balance-sheet recession,” warned of policy zigzag, or lack of persistence and consistency, as one of the lessons learned from Japan’s experience. Japan failed to pull itself out of a deflationary cycle despite 15 years of government stimuli because authorities tightened up on liquidity pumping in 1997 and 2001.

He argued that recovery was delayed for at least five years and cost Japan an extra $1 trillion. If Korea plans to halt stimuli on concerns for their toll on the fiscal balance sheet, it is better not to attempt it in the first place. There will be results only when policy remains consistent until the desired effect sinks in.

Translation by the Korea JoongAng Daily staff.

JoongAng Sunday, Aug. 3, Page 31

* The author is a professor of economics at the National University of Singapore.

BY Shin Jang-sup