Toward a digital New DealThe new administration’s economic policies are directed toward promoting growth for the people. The effects of quantitative growth led by large manufacturers since the late 1990s have waned, and the economy is moving at a snail’s pace, weighed down by income disparities. President Moon Jae-in proposes growth oriented toward increasing income for the people and the small businesses that have been neglected by the past growth model.
Income-led growth stems from the Keynesian principle of effective demand. Income in the form of wages, interest and profit returns is the reward for contribution to productivity. Income-led growth, therefore, aspires to boost the working and middle class. The policy direction is the right answer to many problems that the Korean economy faces in income inequality and a lengthy structural slowdown.
But there are concerns about a balloon effect. Increased income can lead to spending, but it can bring about negative repercussions in the economy. Companies might refrain from investment because profit has to go to paying employees more. Keynesian theory basically prescribes increase in consumer, corporate and government spending to expand aggregate demand and the economy. But as the local economy is stuck in a structural slowdown, it is also important to boost growth potential. Corporate investment and innovation are inseparable, and growth in innovation is essential in scaling up the country’s growth potential.
Joseph Schumpeter in the early 1900s explained the dynamics of this economic growth as “creative destruction.” He claimed the economy must incessantly destroy old models and create new ones. When a revolutionary entrepreneur introduces an innovation, he or she can create new demand and solve the shortage of effective demand. Apple’s iPhone packed a computer into a phone and changed the mobile phone industry by creating new demand in the handheld device.
The government ought to aid in creative destruction. It should remove various regulations that get in the way of inventions and development, and create an environment supportive of experiments and innovation. Schumpeter’s prescription cannot exact an immediate effect. The Keynesian model of government spending to stimulate demand is a short-term action whereas Schumpeter’s design aims to expand supply in the long run to create new demand.
Critics have been claiming that the new government’s policy follows a Keynesian prescription and has little of Schumpeter’s. But they haven’t seen the big picture. The government has launched a committee on the fourth industrial revolution and named innovation as one of four engines to stimulate growth. The administration’s policy began with a focus on income-led growth, but it will end with innovation-led growth.
The fourth industrial revolution is about convergence. We need both short-term and long-term designs for our new growth model. Innovation is not just about technological advances and the supply structure. A key factor is the market. A product and technology cannot be deemed innovative if the invention does not succeed and work in the market. To stimulate innovation, it is important to foster a good business environment. The public sector’s role is crucial.
The government under former President Roh Moo-hyun sought public-sector digitalization and created a huge IT market as a result. The work advanced Korean tech companies, created jobs and paved the way for companies to venture overseas. Korea’s competitiveness in technology became the world’s third highest in 2007. Expansion of the public-sector market can provide a strong impetus at a time when growth potential is weak.
Korea needs a mix of Keynes’ and Schumpeter’s prescriptions, and we can coin this as a “digital New Deal.” Under such a program, the government would invest heavily in new technologies like artificial intelligence, big data and the Internet of Things — technologies that define the fourth industrial revolution — and apply them to public functions like tax collection, welfare distribution, disaster response, public health, crime prevention and transportation.
Unlike past infrastructure-oriented New Deal programs, the government will not just invest to create effective demand, but also create an environment for innovation to flourish. A digital New Deal would explore and create platforms for mass-scale public services, fix regulations and design a new public procurement system for innovation that could stimulate start-ups and other enterprises. It would spur both demand and supply.
The government will unveil a specific plan soon. In the fourth industrial revolution, a digital New Deal will play an important role in expanding both demand and supply for innovation-led growth.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Oct. 23, Page 33
*The author is a professor at Sun Moon University and member of the Presidential Committee on the Fourth Industrial Revolution.