Half-cooked prescriptions

Choi Kyung-hwan, deputy prime minister for the economy, shot straight from the shoulder even before he took office.

During his confirmation hearing last July, he said, “We are clad in winter’s clothes in a hot summertime. I will revive the real estate market’s functioning through normalization of regulations on trades. Once the debt structure improves, the risks in household debt will decrease even when the amount increases.”

He was point-blank in his actions and words. As soon he took office, he eased mortgage requirements by readjusting the cap on the loan-to-value ratio to 70 percent and 60 percent for the debt-to-income ratio. In short, he made it easier for people to borrow in the hope that the move would breathe some life into the real estate market and domestic demand in general.

Arm-twisting the Bank of Korea was his next move. In his usual way, he said he expected the central bank’s monetary committee would reach the appropriate decision to help reinvigorate the economy. He pretty much spelled it out that he wished monetary policy makers would lower the key interest rate. Bank of Korea Governor Lee Ju-yeol and his monetary policy committee have been more or less compliant. Market watchers said the central bank cut the rate when Choi issued the order.

The key interest rate remains at a record low of 1.5 percent since June after a fourth cut in less than a year. The government was pushing consumers to seek cheap loans to buy homes.

The public complied. Over 65,000 apartments in Seoul exchanged hands over the first six months of the year, more than double the average trade of 32,000 homes during the first halves between 2008 and 2014. Apartment values rose 2.2 percent in the first half, the biggest rise in six years.

A trickle-up effect has been common in the past for the Korean economy. A real estate boom is most effective in boosting domestic demand. When apartments go up, workers are needed for a variety of jobs from plastering to interior construction. Many materials and supplies are needed for construction. That is why governments habitually turn to real estate stimuli to prop up the economy.

A year has passed since the measures were taken. The market has warmed up but the ripple effects haven’t been seen. There are signs of life in the real estate market but they’re feeble. The economy has hardly moved, recording flat on-quarter growth for the past four consecutive months. The economy grew 0.3 percent in the second quarter from the previous three-month period, largely helped by a 1.7 percent pickup in construction investment. General consumption fell 0.3 percent, and exports’ contribution to the economy also dropped during the last four quarters. That’s mostly attributed to the Middle East respiratory syndrome (MERS) outbreak in May, but the mining and manufacturing sectors have been contracting since April. Investment, too, remained sluggish.

Worse, the double stagnancy in exports and domestic demand does not look temporary. The economy may already be mired in a structural slowdown. That is why the real estate stimuli has not had a reinvigorating effect on the broader economy. The prescriptions Choi’s team used to aid the economy were all well-intentioned but not strong enough. Short-term actions are necessary, for sure. What’s more imperative for the economy are structural reforms. Painful transformations are necessary so that the economy can grow in new ways. The government pledged reforms in four areas: public enterprises, the labor market, finance and education. But little progress has been made. This is no surprise given Choi’s credentials.

Choi is a three-time lawmaker from North Gyeongsang province. He is a loyalist of the president. He was once a presidential candidate for the conservative party. Someone who is a shrewd politician is not necessarily an equally capable or skilled economic bureaucrat. Choi is bound to run in the general election next April. His constituency is a traditionally conservative base. A heavyweight like himself doesn’t necessarily need achievements to boast about. And he would not want to risk losing votes by spearheading contentious reforms. And reforms are, by nature, controversial.

Easy stimuli actions usually have some effects. They have side effects too. Easing credit to boost the real estate market accelerated an increase in household debt and the figure now exceeds 1,100 trillion won ($949.9 billion). The government is fearful of the snowballing debt. It suddenly tightened eligibility for consumer loans.

Ordinary people are obviously confounded by the change of attitude by the government. In fact, they did not buy houses entirely willingly. They took out loans to buy homes because jeonse prices have shot up so far. The sky’s the limit in jeonse prices. People won’t be able to borrow easily from next year. They will have one choice if they cannot afford jeonse or get new loans. They will have to pay monthly rent, which means they will have less to spend. The economy will only worsen, and confidence in the president will hit the bottom.

There is only one way out of the current conundrum. Cabinet members including Choi, whose attentions will soon turn to next year’s general election, must avoid that temptation and devote themselves to salvaging the struggling Korean economy. The president only has half of her five-year term left. The politicians-turned-ministers in the cabinet must do her and the nation a favor and do their jobs right while they are at it.

JoongAng Ilbo, July 29, Page 28

*The author is the business and industrial editor of the JoongAng Sunday.

by Kim Jong-yoon