Navigating rough economic waters
The author is a professor of economics at Korea University and president of the Korea Economic Association.
Economic growth, stable prices and fair distribution are goals of national economic governance. A state must endeavor to increase income for the people, stabilize consumer prices and housing prices and provide an environment where all the people can lead happy lives. But three whammies — low growth, high prices and the polarization in wealth — are affecting the lives of people.
The Bank of Korea has been raising the base rate in the face of inflation. The consumer price index (CPI) rose 4.1 percent in March on year, the fastest pace since 2012. Food prices, transportation fees, utility charges and entertainment costs have risen sharply. When living expenses, which is not included in the CPI, are accounted for, inflation would be greater than the data indicate. Due to global supply bottlenecks and the appreciation of international oil and grain prices, strong inflation is expected to continue for some time. Since the central bank’s primary role is to stabilize prices, it must naturally raise rates.
Higher interest rates can hurt consumption and investment. Interest costs land harder on the indebted lower-income households and could worsen income disparity. The rate policy aimed to stabilize price falls could have an undesirable impact on the other two goals. As external supply factors have been fanning prices, uncertainties on the domestic and external front are significant. It is hard to assure that higher rates can help tame inflation.
A single policy cannot solve the problem. To catch three rabbits at a go, the net must be tightly interwoven. Fiscal and financial policies and supply measures must blend well with monetary policy to cause a synergy effect to sustain stable growth and improve income distribution.
On March 31, the Korea Economic Association, the Korean Academic Society of Business Administration, the Korean Political Science Association and the Korean Sociological Association held an academic conference on the theme of tasks of the new government to achieve sustainable growth for South Korea. President-elect Yoon Suk-yeol said in his congratulatory speech that the society urgently needs to overcome low growth and ease polarization to improve growth and distribution above all. The new government must set clear goals and direction in economic policy to give hope to the people. Although price stability falls under the jurisdiction of the central bank, the government must set specific goals on growth and distribution.
Members of the four academic associations agreed that sustainable growth in quality jobs should be the top priority for the new administration. Creating decent job opportunities for young people and enabling more women and elderly people to join economic activities can help in both growth and distribution. To achieve the goal, the government must remove excessive regulations and encourage corporate investment and innovation.
The new government must ease rigidity in the labor market to create more employment opportunities and reform education. The state must invest in people and technology and promote new industries and growth. Increased productivity and supply through new industries and growth can also help ease prices.
Polls reflect public skepticism about the incoming administration in improving distribution. Members of academic societies cited easing income disparities as the policy in which the new government could be the weakest. The new government must come up with welfare policy that can ease inequalities and at the same time aid growth. Measures to support birth, childcare, education and housing for low-income households and promoting innovative habitats by connecting regional universities with innovative industries can enhance distribution as well as growth. Stabilizing the property market and the effective allocation of resources can also contribute to improving wealth inequality and growth.
Domestic and external economic conditions are challenging. The new government must start off on the right foot. The United States faced recession and inflation in the 1970s. Yet the U.S. Federal Reserve expanded the dollar supply and the Nixon administration carried out economic policies for short-term political gains to harden the economic situation. After Paul Volcker became the Federal Reserve Chairman in 1979, the Fed pushed up benchmark rates to tame the inflation. But unemployment shot up to 11 percent and the recession lasted for three years. When economic policy missteps accumulate, the harm can be lasting. The government must properly set economic policy direction and goals and navigate them well.
Translation by the Korea JoongAng Daily staff.