Remedying income-led growth
*The author is a senior editorial writer of the JoongAng llbo.
According to political critic Park Sang-hoon’s book “The Blue House Government,” the number of staff in the presidential office in Seoul is 490. The Blue House is not just bulky, but wields outsized power. It towers over the cabinet with little restraint. Moreover, its members are of the same line of thinking. On the economic team — the policy chief, senior presidential secretaries on economic affairs as well as aides on the economy, science and technology — were all recruited from the progressive camp.
A group of the same breed can be at risk for a “collective intelligence” trap, which is self-reinforcing shared thinking and justification for a group’s belief. President Moon Jae-in was sure that the minimum wage hike had brought a positive effect.
Someone must have erroneously planted in the president’s head that a higher minimum wage, shorter work hours and increased number of public employees could revive the economy.
Ever since Moon mouthed his conviction, income-led growth has become the irrefutable stance of his administration. His senior secretary for the economy went so far as to leave out self-employed and unemployed people in the statistics on household income in his report to the president so as to hide how bad the income disparity has become. This is despite the government’s policies being allegedly aimed at increasing the incomes of the underprivileged.
The economic team of the Blue House, backed by its enormous power, even confronts the market. They firmly believe that unions should be respected, while employers be tamed.
Companies are keeping themselves low as there is little they can do.
“The Blue House neglects two most important goals for companies,” they complain. One is globalization. Companies must look beyond the national border for further growth, but the Blue House is entirely engrossed with home affairs. Such policy is only pushing companies offshore. The more it presses on with wage hikes and sharing profits with weaker parties, the more companies will wish to take their businesses or factories outside or give work to foreign suppliers. The other involves the future. Companies should have their eyes on the future, but the government adheres to the past.
Korea Inc. increasingly makes conservative investment goals and keeps their activities to a minimum for survival. It is no wonder that facility investment has been contracting. The economy hinges on exports, and yet the growth rate hovers below the average gains in global trade.
Exports have kept up growth against the same period a year ago, but they are mostly helped by a higher export price due to spikes in international oil prices. The government maintains the economy can grow at an annual rate of 3 percent. Most economic think tanks put the figure below 3 percent with some predicting a number as low as 2.7 percent. Many warn the economy has entered a receding stage.
Statistics don’t lie. Kim Dong-yeon, deputy prime minister for the economy, and state think tank Korea Development Institute lowed their expectations for new jobs in the second half to less than 20,000, which is about half of the government’s original goal.
The government vowed to make an increase in jobs its top priority. But refusing to accept the economic reality will not make the problem go away. If the government insists on its ways to increase income, it will have to compensate for its policy mistakes with tax funds. That kind of makeshift action cannot last.
Economic follies change the political landscape. There are ample cases of failure due to a pursuit of unfeasible campaign pledges. Under President Roh Moo-hyun, the government pursued decentralization. At that time, 87.1 trillion won ($81 billion), offered in compensation for landlords in return for yielding their lots for the creation of innovation complexes and cities, flooded into the capital for investment in housing in southern Seoul. This resulted in out-of-control spikes in apartment prices in exclusive areas.
Here’s another. Welfare benefit spending without tax increases as promised by President Park Geun-hye wrecked public finance. The health minister who opposed reckless welfare spending was sacked and joined the opposition party. Yoo Seong-min, the former ruling party floor leader, also became stigmatized as a traitor to the president when he claimed that welfare without tax increases was a lie. The ousting of Yoo partly led to the crumbling of the ruling party and Park’s presidency.
The Moon Jae-in administration must not go down that ill-fated path. With the end of the local elections, a reshuffle of the presidential staff and cabinet is expected to follow. Before making appointments, the president must examine whether the economy has the strength to endure the experiments of his ill-conceived income-led growth policy.
Governments around the world are competing to make the labor market more flexible and stimulate entrepreneurship. Only a small pool of labor experts ardently champion the theory that Seoul alone is experimenting with. The economy is too weak to serve as a test bed for progressive economists. The government must seriously consider an exit strategy on its half-baked policy.
JoongAng Ilbo, June 13, Page 27