Picking our priorities

Many a true word is spoken in jest. There is a gloomy gravity behind the new pun in Korea that says there have been three major rans, or calamities: the Imjinwaeran (the Japanese invasion in the 16th century), the Hankukdongran (1950-53 Korean War), and the Kim Young-ran law. Spending has been hard hit by the new and wide-ranging anti-graft law, dubbed the Kim Young-ran Act after the former anti-corruption commission chief who first proposed it in 2012. The law came into effect in September and is designed to put an end to longstanding customs of gift-exchanging and entertaining as a part of doing business and building connections in Korea.

Consumer spending has contracting for the third consecutive quarter. People are holding onto whatever they have left because of little improvement in incomes and insecurity about the economy picking up in the near future. Korea’s personal saving rate jumped to 8.66 percent.

Skepticism prevails over next year’s economy. Most economic forecasts put growth at 2.5 percent, slower than this year’s estimated 2.7 percent. Nomura Securities, which warned of a looming financial crisis for South Korea in the late 1990s, estimates the economy will only manage 1.5 percent growth next year.

Interest rates and foreign exchange rates are not in our favor. The U.S. Federal Reserve is most certain to start lifting interest rates as soon as this week. The central bank can no longer delay its tightening given the solid economic performance in the United States and inflationary pressure once the incoming Donald J. Trump administration begins to fulfill his campaign pledge of infrastructure spending of $1 trillion and tax cuts to speed up economic revival.

The Bank of Korea won’t likely immediately follow suit. “The U.S. is an exception. Europe, Japan and others are still clinging to zero interest rates and quantitative easing for loose liquidity,” a member of the BOK monetary policy board said. “Given the slow-motion in the Korean economy and household debt of 1,300 trillion won ($1.1 trillion), we actually need to lower interest rates further,” he added.

Still, interest rates in Korea will inevitably rise. Market yields have already shot up. Few mortgages offer interest below 4 percent. Some even charge 5 percent, up 1 percentage point from September. If the Fed carries out two more quarter-point hikes next year, the
benchmark interest rate in the U.S. would be at 1 percent, closer to Korea’s 1.25 percent. Foreign capital would not stay in Korea when U.S. assets yield similar returns. The exchange rate is more responsive. The U.S. dollar jumped to 1,200 won from 1,110 won when the U.S. raised the base rate in December last year. Foreigners are certain to move out when a strong dollar adds to the appeal of the U.S. market.

The effect of U.S. tightening on the global economy is huge. The 3-percentage-point hike in 1994-95 caused the Asian financial crisis and the 4-percentage–point hike in 2004-06 subprime mortgage crisis in the U.S. led to a financial meltdown. The U.S. Fed has been extra discreet in raising interest rates because of the global consequences following the faster-than-expected slowdown in the Chinese economy and unsettling outcome of the British vote to leave the European Union. It now reasons that higher U.S. interest rates could do more good than harm to the global economy. The focus is the pace, not the timing of the end of the ultra-low interest rate era.

Once rates go higher, the Korean real estate market will freeze. Consumption, investment and exports all could further weaken. But even in a drought, a farmer has to farm. We must prepare for the future. What’s more fearful than the political and social consequences of an impeachment of the president is the heavy toll on the budget for so-called creative economy projects and the entertainment industry. Even with President Park Geun-hye gone, her signature projects on the creative economy and startups must be saved. A country has a future when it invests in the young.

The cases of Greece and Iceland provide good examples. The two countries were heavily hit by the 2008 global financial crisis. But their two governments chose opposite steps to fight the crisis. Greece went into stringent austerity. It poured in borrowed funds to save an ailing banking sector at the expense of jobs and a future for the young population. It shaved research and development, training, and unemployment subsidies. Young Greeks went overseas. The economy has receded for five straight years and unemployment shot up to 25 percent. It sets an example of how a nation can be wrecked if it does not invest in the young and the future.

Iceland was different. It let the troubled banks go under and used what was left in the coffers to strengthen social security and retrain the young and jobless. The economy recovered. Retrained young people started their own enterprises. The economy in 2011 was able to grow 2.9 percent. A stable economy also settled politics. The Pirate Party, whose approval rate hit 43 percent with a populist platform in last month’s election gained a mere 14.5 percent of the votes.

In its White Paper on its lost decades, Japan commented that its fulsome fiscal spending had not been wrong, but it regretted not spending on research and development and training. We should learn from the mistakes of others. It’s a pity that words like innovation and creativity are tarnished as legacies of the Park Geun-hye administration. The creative economy should be spared the political regicide.

JoongAng Ilbo, Dec. 12, Page 34