Gov’t pulls out stops to get 3% growth in 2016
The Ministry of Strategy and Finance announced on Wednesday that it aims to achieve 3.1 percent growth in real GDP in 2016 by boosting domestic consumption and investment, and pulling the economy from the verge of the so-called “consumption cliff,” referring to a severe contraction in private consumption.
Reaching the growth goal is even more important next year, when the Park government completes its three-year economic reform plan. In early 2014, President Park announced her administration would raise the country’s overall employment rate to 70 percent and try to achieve both 4 percent yearly GDP growth and $40,000 in gross national income by 2017. But the government faced unexpected hurdles, including the Sewol ferry tragedy in April 2014 and the Middle East respiratory syndrome outbreak in May 2015, both of which froze domestic consumption for weeks or months.
Despite the government’s ambitious 3 percent growth goal, other predictions are less sunny. Last week, the Korea Development Institute, a state-run economic think tank, forecast the Korean economy would grow around 2 percent next year if the global economy remains as sluggish as this year. Overseas investment banks made similar forecasts.
As a means of achieving 3 percent growth, the government decided to manage the real growth rate and nominal growth rate together.
“Economic policy-making that used to be focused on real GDP growth will also consider the nominal growth rate in order to shift the policy focus to how the general public feels about the economy,” said Choi Kyung-hwan, finance minister and deputy prime minister for the economy, at a press briefing at the Seoul government complex in Gwanghwamun.
The nominal GDP growth is not adjusted for inflation, so it is usually higher.
The minister emphasized that policies are aimed at ramping up sluggish demand. He pointed out the importance of a mix between the central bank’s inflation management and the government’s fiscal policy.
“Managing inflation means that the government will expand the equilibrium for the economy, and the Bank of Korea will collaborate with the government by managing the inflation target higher than before,” Choi said.
As the Bank of Korea (BOK) set its inflation target to 2 percent for next year, the Finance Ministry’s nominal growth goal is 4.5 percent.
The central bank also made a major change in its role from an inflation fighter to a deflation fighter. The 2 percent target is the lowest since 1998. The BOK has concluded that prices should grow at least 2 percent in order to support economic growth.
“The BOK will make its best efforts to emerge from low inflation,” Suh Young-kyung, deputy governor of the BOK, said.
Analysts interpret the central bank’s decision as cooperation with the government to stimulate domestic consumption.
The 2 percent target marks a significant cut from a target band of 2.5 percent to 3.5 percent for the 2013-15 period.
However, it will mark a rise from actual inflation, which remained below 1 percent for 11 consecutive months until a 1 percent year-on-year gain in November, which was a 12-month high.
So far, increases in consumer prices have remained below the 2013-15 target every month.
The government’s top priority next year is to prevent the economy from falling off the consumption cliff.
Concerns are mounting that consumers will stop spending when cuts in the individual consumption tax end this year.
To combat that possibility, the ministry decided to hold large retail discount events - which were tried this year for the first time - every November.
“By regularly holding the sales events - K-Sale and Korea Black Friday - retailers will be able to develop discount-only products,” said Lee Chan-woo, director general of the economic policy bureau at the ministry.
To further boost the domestic market, the government will try to attract foreign tourists more aggressively. The ministry said it will lower the age of Chinese visitors eligible for double-entry visas from the current 60 to 55.
At 11,000 duty-free shops across the country, tax refunds for tourists will be made on the spot.
To attract investment, the government’s key agenda is deregulation.
The National Pension Service, the world’s third-largest pension fund operator, will increase its investment in domestic properties, infrastructure and private equity funds by nearly 10 trillion won to 31 trillion won next year.
As many as 50,000 public rental units being built by private construction companies - dubbed “New Stay” residences - will be built next year.
In 14 cities or provinces across the nation, the government will establish so-called regulation-free zones that will cater to particular industries and eliminate regulations that hinder those industries. Free zones will be set up in every region outside the capital area, which will make it easier for companies to engage in cutting-edge industries without being held back by red tape.
In the first quarter of 2016, the Finance Ministry will spend 125 trillion won ($106 billion), up 8 trillion won from an earlier plan, to support economic recovery. Public institutions will also expand their total investment by 6 trillion won.
To support struggling exports, the ministry will expand funding of the Export-Import Bank of Korea and Korea Trade Insurance Corporation from 251 trillion won to 271 trillion won for the whole year.
To help boost exports of promising products like cosmetics, the ministry will support R&D by establishing cosmetics-related departments at colleges. It will also ease regulations on indirect advertising of fashion items in television shows.
Korea will also try to attract Chinese investors by utilizing the Korea-China Free Trade Agreement that is going to take effect on Sunday.
BY SONG SU-HYUN [firstname.lastname@example.org]