Lessons from Chun Doo Hwan

A female student hands out flyers containing anti-military regime sentiments in front of the university library. She is suddenly encircled by police officers in plain clothes who emerge from nowhere. One of them pulls her by the hair. She vanishes from sight in a few seconds. We watch the scene from a safe distance. We are demoralized in a confounded mix of shame, guilt, rage and helplessness.

The scene is repeated regularly, at least once a month.

Those scenes are from my university days in the beginning stages of the military regime of President Chun Doo Hwan in the early 1980s. I dislike the former president for leaving me traumatic memories of my college days. I have no good words to spare for him. But I have to confess he did one thing well. Soon after he gained power in a military coup, Chun implemented a set of stabilization measures. The world was then rocked by the second oil shock of 1980. Our society was insecure. The economy was in a fragile state. Inflation was as high as 28.7 percent. The economy contracted 1.5 percent.

Tightening was needed to rein in inflation and stimuli to bolster the economy. At the time, people thought the country was doomed if its economy did not sustain double-digit growth. Growth had been the mantra that kept the society moving. Chun took a gamble. He chose to tame inflation over stimulating growth. It was an unprecedented step for the Korean economy. Chun was taking advice from his senior economic secretary, Kim Jae-ik.

Tightening is always an unpopular macroeconomic policy comprised of bitter prescriptions of pain and austerity. There were more pro-growth policymakers who opposed what they called “naive” stabilization measures from the government. Chun pushed ahead with his beliefs. He did not waver.

Some would say that was possible because of his ironfisted military style. But a lot of endeavors were involved to make the campaign work. Kim and cabinet ministers met with opinion leaders and explained the need for the stabilization actions. Chun went out personally to seek understanding and support from the legislature. As result, inflation that was 21.4 percent in 1981 came dramatically down to 7.2 percent in 1982 and 3.4 percent in 1983. Once prices were stabilized, growth picked up, rising to 6.2 percent in 1981, 7.3 percent in 1982 and 10.8 percent in 1983. Korea’s peak of the late 1980s was possible because of these stabilization measures.

There are lessons to be learned from three decades ago. Consumer prices were a problem then because they were too high. They’re a problem now because they’re too low. Inflation has been around 1 percent for 25 months in a row. Capital flow is interrupted and consumption is tepid, typical signs of deflation. What should be done is exactly the opposite of 30 years ago. Inflation must be incited to facilitate liquidity.

Deputy Prime Minister and Finance Minister Choi Kyung-hwan has implemented fiscal and monetary easing to stimulate the economy. He has been much more eager to revive the economy than his predecessor. But his stimuli actions remain traditional. Although he feels frustrated, he dares not invoke inflation. That idea, of course, would be out of the question for the Bank of Korea, which prizes price stability above all. It’s the reason for its existence.

Makeshift actions cannot address deflationary risks. We may have to consider radical policy moves as we did 30 years ago. As growth was sacrificed for price stability then, we need a policy now to get out of our deflationary tunnel. This will require persuasion and communication. Even the military regime had to plead for support. The ministers should get to work and if necessary, the president must go all-out to inflate prices.

The government should not be too pressured to come up with results. Choi Kyung-hwan’s economic team is already considered a failure even though it has been at work for just months. Economic policies need time. The stabilization measures of the 1980s took three years to kick in. They were the results of sacrifice and pain. Japan is a lesson. Fighting deflation could take years. One may also worry about disruption in structural reforms. But regardless of macroeconomic policies, structural reforms must go on. Capital flow will normalize through structural reforms and then the economy will safely pull itself out of deflation. The drive for structural reforms and fight with deflation must go hand in hand.

JoongAng Ilbo, Dec. 15, Page 32

*The author is the acting editor-in-chief of the JoongAng Ilbo.

by Koh Hyun-kohn