Dangerous, wishful thinkingThe Ministry of Economy and Finance in its latest monthly economic report listed downside risks to the Korean economy. It pointed to a “weakening trend” in key data of industrial output, investment and consumption. It removed the mention of “positive momentum” used in the previous monthly report amid improvement in some economic data. The economy does not see trends reverse over a single month. The ministry had over-hyped a temporary recovery in output and consumption during the Lunar New Year break.
The state-run Korea Development Institute (KDI) in its monthly review was more consistent and accurate in warning of continued sluggishness in the economy.
Wrong diagnoses lead to wrong prescriptions. The ministry’s upbeat observation of the economy led President Moon Jae-in to claim the economy was making a “solid recovery.” A few days after his comment, industrial output for March showed a sharp deterioration in production, investment and consumption.
During a meeting with civilian organization representatives, Moon defended the government’s income-led growth policy as an internationally established theory with history. He could not have spoken with such confidence unless he was misled by his aides. The reversal in the ministry’s economic review suggests how far the government goes to advocate for the income-led growth policy.
The sudden pessimistic tone also may also be aimed at supporting the government’s rationale for a supplementary budget. The International Monetary Fund recently said the Korean economy won’t be able to grow by the government target of 2.6 percent to 2.7 percent this year unless the government does more through increased fiscal spending. The administration has been creating a supplementary budget every year since Moon took office in 2017.
Time has come for the government to clearly look at problems in its economic policy to see if it needs an extra budget for the third year in a row. Otherwise, its proposal may be suspected of having a populist design ahead of a general election next year. The government will have to keep up this deficit-financed expansion if it continues to see what it wants to see. The Finance Ministry, which should be the most cool-headed over public finances, has also fallen under this collective spell of wishful thinking. With such naïve policy-making, consumers and businesses could quickly lose confidence and hope in the economy.
JoongAng Sunday, April 13, Page 30