Concerns about Korea’s New Deal
The author is a professor of economics at Korea University.
The summer of 2017 was hot. People had high expectations after President Moon Jae-in promised an economy where people can get along and prosper. New economic policies were churned out. People anticipated that J-nomics, named after President Moon Jae-in, would save the Korean economy from low growth and inequality. However, notable J-nomics policies — such as the income-led growth, a significant hike in the minimum wage, expansion of public jobs, a nuclear phase-out and pro-labor policies — did not produce desired results. Instead, the economy grew distant from the goals of creating good jobs, stabilizing livelihoods of the common people and achieving “inclusive growth.”
Economic experts at home and abroad advised revising or scrapping controversial policies and implementing policies based on empirical evidence rather than ideologically-driven policies. Excessive regulations should be reduced to enhance the vitality of the private sector and increase productivity through reforms in labor, education and public sectors. The advisors emphasized the importance of industrial structure and technological reform for profitable industries of the future.
They warned that Korea could experience Japan’s “lost 20 years” if the country adheres to wrong policies and suffers external shocks. If hefty welfare spending causes trouble in fiscal health, Korea can experience the economic crisis that Central and South American populist countries suffered, they warned.
The Blue House ignored the advice. Those criticizing J-nomics were considered vested interests and deep-rooted evils undermining the spirit of the “candlelight government” on Gwanghwamun Square. Internal critics left one after another. If there are no economic elders or aides with competency and virtue by the president, it is hard to correct the course. When people with similar ideas gather, “confirmation bias” — believing only what you want to believe — grows.
Finding and implementing the best economic policies to achieve the desired effect is not easy without expertise and experience. Intuitively economic policy often brings unintended side effects. For instance, political leaders — and a majority of citizens — can think the wage is too low, housing and leasing prices too high and the current interest rate not appropriate. But policies that allow the government’s direct intervention in pricing can have serious side effects. Policies to resolve inequality — such as a minimum wage increase — can reduce hires at mom-and-pop stores and actually help deepen inequality.
When money in circulation is overflowing and there is no other place to invest, funds zero in on the real estate market, where people expect price increases due to supply shortages. Trying to resolve the problem with regulations and taxes without consistently increasing housing supply can cause adverse effects. The government spent massively, but the effect of job creation was insufficient. The budget should have been used on policies to make sustainable and quality jobs without letting public jobs offsetting private jobs or delaying restructuring.
The Moon administration has reached its fourth summer. Last week, the Korean New Deal was announced to overcome an economic slowdown from the Covid-19 outbreak and structural transformation. With three axes of the “digital New Deal” — promoting digital innovation in the overall economy, accelerating a low-carbon economy through “green New Deal,” and reinforcing the employment and social safety net — a total of 160 trillion won ($133.6 billion) will be invested, including 114.1 trillion won from state coffers, by 2025, to create 1.9 million new jobs.
People have high expectations for the Korean New Deal to add jobs, create future industries and contribute to sustainable growth. In fact, the Green New Deal is in line with the “green growth” of the Lee Myung-bak administration and the digital new deal with former President Park Geun-hye’s “creative economy.” However, there are considerable concerns about how many outcomes the government-led investment project will have in the late stage of the term. I find it doubtful whether fiscal spending can serve as a primer for private sector innovation and investment without reforms in regulations and systems. The big picture seems plausible. But as “the devil is in the detail,” it can end up with pork-barrel projects.
Economic strategies change, but the people remain. I want to question who in the administration can be in charge of implementing the policies and verifying the effects. The five-year plan has been proposed, but there will be no continuity if the administration changes. In the end, it can only add government debts without outcomes. It is not easy for the fallen J-nomics to fly again on the wings of the Korean version of the New Deal. I am worried the Korean New Deal will end in fancy words. I hope the proposed policies are properly verified and implemented to make outcomes in stabilizing people’s lives and for an economic rebound.