Ideals and the economy
The author is a senior editorial writer of the JoongAng Ilbo.
Floor leaders of opposition parties had mixed reviews of President Moon Jae-in’s defense of his income-led growth policy after they had a roundtable discussion on the matter at the Blue House on Monday. Kim Sung-tae of the main opposition Liberty Korea Party (LKP) believed the president felt some limitations in pressing ahead with the controversial policy. Jang Byung-wan of the Party for Democracy and Peace sensed a “subtle” change in the president’s view of the policy. Kim Kwan-young of the Bareunmirae Party thought the president would nevertheless stick to the policy regardless of its negative effects.
I would favor the judgment of Kim of Bareunmirae Party. The president has unwavering confidence in this novel trickle-up economic theory that believes wage increases can spur domestic demand to generate a benign cycle of lasting and balanced growth. “We are entering the path not taken,” Moon said at the beginning of the discussion. He claimed the government was heading in the right direction. Lately, he’s been declaring he cannot put the economy on the path of the past. The president and his aides argue that the problems were just “growing pains” in changes to the economy’s fundamentals. Jang Ha-sung, Moon’s policy chief, announced that the merits of income-led growth policy will show starting next year. Income-driven growth has become a kind of religious faith for the Blue House.
Will things get better next year? The Moon administration has embarked on two operations to press ahead with its income growth policy. First, it aims to window-dress the statistics. The government has been nagging public companies to add 56,000 jobs for two months in order to prop up the annual number of employed persons. Second, it is pursuing a supersized budget for next year, a whopping 9.7-percent increase from this year’s record spending, which itself was 7.1 percent larger than the previous year. The government turns to fiscal spending as if its coffers are bottomless.
Economics is a relatively precise social science. It may not be as accurate as mathematics, but nevertheless is based on data-backed methodology and measurements. There is a greater chance that the income-led growth policy may hurt more next year. The outsized 2019 budget of 470 trillion won ($419 billion) could inflate growth by about 0.2 percentage point. But the gains will be overwhelmed by other negative factors. There is simply no upside in the coming year.
U.S. interest rates are expected to go up four more times — or a total of 1 percentage point — to hit 3.25 percent by the end of next year. A 1-percentage-point rise in the Fed’s funds rate cuts the growth of Korea’s gross domestic product by 0.2 percentage points should Korea match the moves in America. The Chinese risk can’t be ignored. The International Monetary Fund predicts China’s annualized growth at 6.6 percent for this year and 6.3 percent in 2019. According to the Hyundai Research Institute, a cut of 0.3 percentage points in the Chinese GDP translates into a 0.15 percentage point dent in the Korean economy.
A slew of internal problems also weighs on the economy. Unions defend the income-led growth as if their lives are at stake. Companies, on the other hand, have been battered by two straight years of double-digit rises in the minimum wage and a cutback in the workweek to 52 hours. Still, they are under constant pressure to increase hiring and investment. Hyundai Motor Vice Chairman Chung Eui-sun chose to go to Washington to meet the U.S. Commerce Secretary instead of accompanying President Moon Jae-in on his visit to Pyongyang in September because business setbacks from a potential U.S. secondary boycott and automobile tariffs matter more to him than ventures in North Korea.
The Korea Development Institute, a government think tank, downgraded its projection for our growth in 2019 over fears about the income-led growth policy. Yoo Seong-min of the Bareunmirae Party dogged Deputy Prime Minister for the Economy Kim Dong-yeon on the likelihood of a recession in two or three years time. If the super boom in memory chips fizzles out and the trade war between China and the U.S. worsens, Korean economic growth could fall to the 1 percent range, if not into negative territory.
The Moon administration, with its idealistic perspective on the economy, may not understand what growth of 1 percent means for a small economy like Korea. The toll on jobs and incomes would be catastrophic. Neglect of growth is more dangerous than obsessive pursuit of growth. The solutions and direction have long been laid out. The government must demonstrate strong leadership to reform and deregulate to promote new industries and the services sector. The labor market must become flexible. Although the German and French ways have been proven right, going in that direction is admittedly not easy.
The administration wants to blindly pursue the untested income-driven growth notion. Progressive groups, including the militant Korean Confederation of Trade Unions, vowed to hold a rally on Dec. 1 to protest what it sensed as a government turn towards the right. Moon won’t be able to part with the progressives easily. But we’re not just on an uncomfortably bumpy ride, we may be speeding towards a cliff. It’s foolish for the government to continue in the wrong direction when it knows the destination is a bad one.
JoongAng Ilbo, Nov. 7, Page 31