Enigmatic Yoon versus 'complex economic crisis'

Economy

Published: 09 May. 2022, 23:11

Enigmatic Yoon versus 'complex economic crisis'

Yoon Suk-yeol became Korea's 20th president starting May 10. [YONHAP]

Yoon Suk-yeol is the first president in more than two decades to begin his term facing an economic crisis.

When he assumed presidency on Tuesday, he became the leader of a Korea navigating the triple threat of inflation, rising interest rates and a falling won.

The odds are stacked against the economy. Like most globally, it's on a knife's edge between overheating and stalling as the pandemic comes to an end and the fiscal and monetary chickens of the crisis come home to roost.

Ending the era of free money without trashing the economy will be a delicate maneuver. The central bank has already started tightening, and while the new governor has said increases will be paced and possibly somewhat trailing those of the U.S. Federal Reserve, the punch bowl is slowly being removed.

In the context of more expensive money, the new government is trying to keep the economy whole and growing with a combination of sizable support and broad reform along pro-business, anti-interventionist and deregulatory lines.

Depending on execution, the government and the bank could be working at cross purposes, or expertly engineering the most challenging of soft landings.

Yoon the man

The new president is in certain ways an unknown. As a political novice, he lacks a track record in public office, and Yoon is not an academic with a publication history to plumb.

During his career as a prosecutor, he developed a reputation for being ruthlessly professional and wading into the fray without regard for politics.

Yoon was involved in the indictments of two conservative presidents — Lee Myung-bak and Park Geun-hye — and major business figures, and was picked by Moon Jae-in to be chief prosecutor in Seoul and spearhead the campaign to root out "past evils." He also doggedly went after Cho Kuk, a former Moon justice minister.

In international affairs, he is making a clear break from his predecessor with a straightforward pro-U.S., tough-on-North Korea-and-China foreign policy and an action plan to mend fences with Japan.

Economic policies suggest some inertia. Yoon has promised to "fully compensate" all small businesses for losses incurred during the pandemic and has mentioned a 50-trillion-won ($39 billion) supplementary budget, the largest ever.

His list of 110 initiatives issued a week before inauguration further muddies the waters. Its vague, wonkish prescriptions are reminiscent of the previous administration, as is the 209 trillion won price tag and the heavy dose of industrial policy.

The document did lean heavily on free market principles and promised decisive change, the transition team emphasizing that the economy will be led by the private sector and that the new government will be pushing for reform in regulation and taxation. Moon's many measures aimed at fixing the real estate market, which only ended up harming it, were mentioned as priorities for reversal.

The few comments Yoon has made about his economic beliefs indicate strong conservative tendencies. When nominated to be the top prosecutor in 2019, he mentioned Milton Friedman's "Free to Choose" as the book that has most influenced him.

"We will respect market principles," Yoon said earlier this year. "In order to overcome the chronic low growth, our economy needs to change from government-centric to private-sector-centric.

The economy will grow as a result of the creativity of the private sector and market efficiency," he added.

Shortly after winning the election, Yoon met with leaders of six business lobbies, including those from the Federation of Korean Industries (FKI). The FKI was shunned by the Moon government, as it was considered too close to the chaebol. The Korea Chamber of Commerce and Industry was favored.

During his campaign, Yoon neatly stitched together liberal capitalistic principles with statist sentiments, saying that without growth, welfare is not possible. He signaled flexibility in achieving his goals, that he will not allow theory to stand in the way of outcomes.

Dream team

Yoon's cabinet picks reflect the new president's emphasis on a market-driven economy. They also support the notion that his administration will be as pragmatic as it is ideological.

Prime Minister nominee Han Duck-soo, Finance Minister Choo Kyoung-ho, economy secretary Choi Sang-mok and chief of staff Kim Dae-ki are all former Finance Ministry officials known to favor free-market principles and less government intervention.

They are experienced in commerce, financial policies and budgets. The Moon administration was top heavy with scholars and professional politicians.

"Regulations that hamper business activity will be lifted boldly, while new growth engines that will back innovation in new industries will be created," Han said. "As a person who has worked both in the public and private sectors, I very much know the pain that people and businesses standing on the edge of life and death are feeling due to shortage of jobs, housing instability, polarization, excessive and irrational regulation and the uncertain international situation."

He directly criticized Moon's income-led growth policy.

"Income-led growth wasn't supposed to be only about raising the minimum wage," Han said. "Companies will have no other choice but to cut the workforce if they can't afford the higher costs."

The prime minister was a Blue House economic secretary under the left-wing Kim Dae-jung administration and served as the finance minister and later prime minister under liberal Roh Moo-hyun, when Moon was chief of staff.

Han orchestrated the free trade agreement with the United States, which was ratified during the Lee Myung-bak administration. He recently stressed the need for Korea to join the Japan-led Comprehensive and Progressive Agreement for Trans-Pacific Partnership, stressing that Korea will lose much if it fails to sign on
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Finance minister Choo has made comments indicating a market-oriented stance.

"So far, the central element of government economic measures has been fiscal spending," Choo said after being nominated. "The reinvigoration and the strengthening of the economy should be centered on the private sector and companies."

He added that the most important goal should be to help companies actively create jobs and increase investment.

"One cannot ignore fiscal spending in addressing the economy," Choo said. "But instead of the government leading the revitalization, it should be the private sector. Fiscal spending should be focused more on protecting the public and helping the vulnerable."

Choo, who has worked in finance, as a lawmaker issued a bill that would lower the maximum corporate tax from 25 percent to 20 percent.

Economic Secretary Choi Sang-mok served as vice finance minister during the Park Geun-hye administration, while Kim Dae-ki, also a former Finance Ministry bureaucrat, was a senior Blue House secretary for economics during the Lee Myung-bak administration.

Yoon has emphasized that he intends to delegate responsibility.

"All authority will be bestowed to each minister," Yoon said during the presidential race in January. "However, the ministers will be fully responsible."

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Inflation risk

Inflation is running hot globally and in Korea due to years of loose monetary policy and the war in Ukraine.

In April, consumer prices were up 4.8 percent on year, and the International Monetary Fund is projecting the full year number to be around 4.0 percent.

The IMF forecasts 2022 growth in Korea to come in at 2.5 percent, Moody's 2.7 percent and Goldman Sachs 2.8 percent, with the IMF warning of stagflation.

In the financial markets, the Kospi is down about 20 percent from the peak, while Samsung Electronics, the largest company is the country, is down 23 percent from its high.

The won is trading at 2-year lows.

Hard decisions

"If inflation continues to increase, the actual purchasing power could be weakened," said Oh Hyoung-seok, head of the Bank of Korea's monetary and credit policies research team. "When interest rates are raised to stabilize inflation, negative effects on the economy may grow."

Yoon is focused on mitigating the effects of rate rises on Koreans.

"Even if rising interest rates are inevitable, we should review plans that could minimize their impact on those that are most vulnerable," Yoon said on April 15. "Signs of a complex economic crisis are abound."

The central bank is under pressure to increase rates for a fifth time in the current round of tightening. It has raised the base rate from half a percent to 1.5 percent since August last year. Two more rate increases are expected this year, taking the base rate to 2 percent.

Bank of Korea Gov. Rhee Chang-yong recently said that while both inflation and slowing growth are equally concerning, he is putting more emphasis on inflation.

The Yoon government has no plan to back down on the supplementary budget promised, citing the struggles and sacrifices of small businesses.

"At this point, we cannot not do a supplementary budget," Finance Minister Choo said. "As much as we need to restrain consumer prices, we will find a way to maximize fiscal and monetary policy, including reducing the size of the budget."

The government is willing to downsize the budget from the initial 50-trillion won to the 30-to-35-trillion-won range considering its effect on inflation, but it could still be near record levels.

The Yoon government says it will not rely on debt to fund the extra spending but will raise funds by restructuring the budget.

“The incoming Yoon government is starting its first year with a mess created by the previous administration,” said Lee In-ho, Seoul National University economics professor, stressing how under the Moon government, the government’s debt-to-GDP ratio rose from about 40 percent to 50 percent.

“The Yoon government has to approach delicately balance policy mix of supporting the small businesses, which have been driven to their limits over the last two and a half years, while controlling inflation,” Lee added.

“Without the supplementary budget, these small businesses will be annihilated, and it be hard for them to recover,” Lee said. “But the budget needs to be spent effectively in areas where it is truly needed and managed conservatively and should be temporary as to minimize inflation.”

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]