Time for policy change

Lee Jong-wha
The author is a professor of economics at Korea University.

Unprecedented Covid-19 shocks this year resulted in the biggest global economic slump since World War II, and Korea was no exception. Fortunately, the global economy has been recovering since the summer, with exports growing and the Korean economy recovering rapidly. Despite concerns about a further spread of the virus, economic recovery is expected to accelerate once vaccines and treatments are available. The OECD predicts that the global economy will contract by 4.2 percent this year but bounce back with 4.2 percent growth next year. Korea’s economic growth rate is expected to be negative 1.1 percent this year, but will likely rise 2.8 percent next year.

A V-shaped recovery is expected, but Korea’s economic prospects are not entirely optimistic. Internal imbalance and uncertainty have grown. This year, the government’s active fiscal policy and increased liquidity from central bank’s low interest rate policy supported the Korean economy.

This year, increased liquidity led to demand for homes by those borrowing money at low interest rates. In the last three years, government’s regulations on housing supply and real estate ended up pushing up housing prices, mostly on apartments in the capital region. The wealth gap between homeowners and those who don’t own homes grew. Those who worked diligently and saved up to buy home someday feel helpless. Some young people say their lives are ruined.

As overflowing liquidity spilled over to the stock market, the Kospi went up to a record high. Earlier this year, many individual investors bought stocks. President Moon Jae-in said that individual investors played a role in defending the stock market. But people who don’t have the extra money to invest in stocks feel relatively deprived. Many investors borrowed money to invest, so they can prepare for risks in the future. Credit-based loans from securities companies doubled to 18 trillion won ($16.5 billion) from the end of last year, and the investment on financial assets with regular loans also increased dramatically.

Global economic uncertainty continues. No one can be sure about Covid-19 and U.S.-China discord with a new administration in the United States. Thanks to the volatility of the Korean economy, the financial market is expected to change. Financial markets supported by liquidity are volatile. If you swim in the ocean, your body floats easily but you could get swept up by waves. Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.” Some people would suffer great losses when liquidity falls.

In the past three years, as government fiscal spending increased, its debt also grew. The National Assembly Budget Office predicted in its long-term fiscal report that if the government does not control its arbitrary spending, Korea’s sovereign debt-to-GDP ratio would exceed 100 percent in 2040 and increase to 186 percent in 2070. The national pension is also expected to incur a deficit from year 2050. But the liberal government’s welfare projects that do not help economic growth are increasing. The Citizens’ Coalition for Economic Justice data show that the size of projects exempted from preliminary feasibility studies has already topped 88.1 trillion won, more than the projects in the two previous administrations combined.

National debt to be paid by the young generation is growing, but their job situation is the worst. Unemployment rate of young people between age 15 and 29 is 8.3 percent in October, but the “real-feel” rate is 21.5 percent if you count in those between jobs. Many young people haven’t got the chance to begin a career. The government spent tax money to create jobs, but short-term and irregular jobs have increased, and the private sector failed to create quality jobs.

Amid shocks of the Covid-19, the government did its best to control the pandemic and revive the economy, but this year, people still had a hard time. Increasing Covid-19 cases and the shrinking economy made people discouraged. The Moon administration advocated a “prosperous economy for all” as a state agenda, and people had high expectations in the early days.

However, income-driven growth and inclusive growth didn’t lead to the expected effects. Real estate policy actually aggravated inequality. Stubbornness from policy makers and lack of communications disappointed many people. Next year will have just as many changes and uncertainty as this year. The government should respond wisely and carefully. I hope to see good economic policies to improve the quality of life for all people with economic stability as the priority.

Translation by the Korea JoongAng Daily staff.