Whip up domestic demand
A slew of gloomy news surrounds the 2015 Korean economy. Headlines say with unanimity that it can hardly escape from the trap of low growth next year. The Korea Development Institute came out with a prediction Wednesday that our economy will grow by 3.5 percent in 2015, and it called that a conservative estimate. The number could subside if the economy faces unexpected variables at home and abroad.
The growth rate forecast by the KDI is 0.4 percentage point lower than the estimate of the Bank of Korea and 0.5 percentage point lower than the estimate of the Ministry of Strategy and Finance. Even if such predictions are met, the growth rate will be below our growth potential of 4 percentage points. Even though it’s better than the predictions for other countries, our weakening growth rates translate into a chronic lack of economic vitality and an indictment of the government’s economic policies.
Yet, on the part of the administration, it is difficult to press ahead with aggressive fiscal and monetary policies of injecting money into the market and lowering interest rates after the central bank on Thursday froze its benchmark rates to put the brakes on fast-growing levels of household debt. Our household debts have shown the highest-ever increase for two months in a row, as evidenced by a 7 trillion won ($6.36 billion) increase in November. The financial authorities have even scrapped a plan to further ease regulations on the loan-to-value and debt-to-income ratios for mortgages after calls for a return to previous policies to curb household debt. The Ministry of Strategy and Finance has taken a wait-and-see approach to the situation.
Just as a virus gradually develops resistance to antibiotics, stopgap measures such as a temporary injection of liquidity into markets and cutting interest rates in dribs and drabs cannot put the economy back on track. An unwanted side effect of such policies is concerns about contradictions among various ministries in the government.
Facing a tough economic challenge, we cannot sit on our hands. The KDI pointed out that the government must reform the public sector by fixing the soaring debts of state-owned corporations and revamping the deficit-ridden civil servants pension program as well as speed up deregulations.
The KDI underscored the need to inject liquidity into the market while seeking to control swelling household debts. But that’s not enough. The government must revive domestic consumption through a groundbreaking set of initiatives to whip up demand.
JoongAng Ilbo, Dec. 12, Page 34