Letting go of a failed policy
The author is a columnist of the JoongAng Ilbo.
As soon as President Moon Jae-in comes to work in the morning, three key aides — his Chief of Staff Noh Young-min, National Security Adviser Chung Eui-yong and policy chief Kim Soo-hyun — report to his office. These days, Yoon Jong-won, senior presidential secretary for economic affairs, has become a regular at the morning meetings as the stalemate in inter-Korean relations has turned Moon’s attention toward the economy. He has been making frequent visits to venture and start-up events and sites. It seems that his policy focus has shifted to innovation from the controversial income-led growth. He even toured Daegu for a briefing on the robotics industry after skipping the March 22 joint memorial service for casualties resulting from clashes with North Korea in the West Sea.
Yet Moon indicated that income-led growth remains the linchpin of his economic policy. In a meeting with civic groups on Monday, he defended the income-led, or wage-led, growth concept as a globally established theory with “genealogy.” He added he was saying what he had kept to himself. In Korean society, which highly respects family, it is defamatory to refer to someone as a person “without roots.” In the old days, the first thing the head of the house would get out of a house on fire was his family history book. Moon must have been annoyed by the reference to his income-led growth policy as an outlandish idea with questionable roots that has never been put into practice.
Moon may have been emboldened by recent moves in crisis-hit Spain and Greece that pushed up their minimum wage by 22 percent and 11 percent, respectively, ahead of their elections. The situation in the two countries, however, differs from Korea’s. The minimum wage has stayed mostly stagnant over the last decade in the two countries. Even after the hikes, their minimum wage level hovers below 60 percent of the median income. According to Kim Nak-nyeon, an economics professor at Dongguk University, Korea’s minimum wage has already reached 74.5 percent of its median income. Still, the wage hikes in Spain and Greece are strongly criticized. Bloomberg observed Spain was taking an “economic gamble” with unemployment rates so high. The Wall Street Journal said the left-leaning governments of the two struggling countries were “betting — against economic orthodoxy — that such increases will be good for growth and employment as well as for voter support.”
Everyone but the president knows that the income-led growth policy is doomed. It is an awful engine that leaks gas on the road. The government has poured out a whopping 52 trillion won ($46 billion) in funding and only created 5,000 jobs. The policy aimed at stimulating consumption has done the opposite — worsening inequalities, dampening investment, deepening unemployment and increasing fine dust emissions. An economic theory needs to be published in top journals to be recognized. Once established, it must get some mentions in economic textbooks. The theory needs empirical studies and cases to back it up. To argue the merits of the income-led growth theory, consumption and capital investment should have picked up and jobs should have been created.
The architect of the theory, Hong Jang-pyo — the former senior presidential secretary for economic affairs — and its executor, Jang Ha-sung — Moon’s former policy chief — were pushed out of their offices after repeating promises that the policy would be effective in time. The president also got himself in hot water by claiming the economy was doing well. While the Blue House kept up the mantra, polls showed public disapproval of income-led growth policy above 70 percent. The people have become disgruntled by the policy, sold as a panacea for all economic troubles, and enraged for being experimented on as if they were laboratory mice. They are beginning to suspect the motive behind the administration’s stubborn obsession with the policy and refusal to admit to its limitations.
The environment is turning from bad to worse. The economy is slowing at a faster pace due to a contraction in exports, with semiconductors in the bust cycle. The external conditions have deteriorated due to slowdown in the economies of the United States, China and Europe. The supersized fiscal spending under the Moon administration could backfire. In a meeting with ruling party leader Lee Hae-chan last month, Seoul Mayor Park Won-soon asked for central government assistance after complaining that tax revenue in the capital has shrunk because of stagnant housing trade amid tax hikes.
If Seoul is running short in tax revenue, conditions in other local governments must also be tough. Collection of national taxes — including corporate and value-added taxes charged by the central government — accounted for 12.6 percent of the government’s annual target in January, which is 1.1 percentage points lower than a year earlier. A shortage of tax revenue could hamper fiscal expansion and lead to issuance of government debt.
Since last year, Moon promised to deliver results. To do so, he must first read the economic data with a clear head and accept his policy has failed. Korea Inc. is quickly sinking due to multiple factors — weakening traditional industries, slowdown in the global economy and a thinning of the working population. But the more Moon clings to a flawed policy, the more he is to be blamed for the troubles. At the end of the day, the pain goes to the people. The income-led policy must be let go of, otherwise it will be a symbol of the liberal administration’s incompetence.
JoongAng Ilbo, April 3, Page 31