Invisible pressure from the government

Kim Chang-gyu

The author is the economic news editor at the JoongAng Ilbo.

Two weeks after President Yoon Suk-yeol took office in May, chaebol vied to announce multibillion-dollar investment schemes. The pledges by 10 largest business groups exceeded 1,000 trillion won ($766 billion). Except for one, their spending schemes coincided with the five-year presidential term. It was unprecedented for corporate leaders to outline their five-year investment plans. These mid-to long-term investment plans are usually not shared with the public as business conditions can change. That is why investment is mostly announced as a one-year plan.

Business prospects also were not positive at the time. A commodity price surge in the wake of the Russia-Ukraine war since February fanned inflation across the globe. According to business survey on 500 large companies by the Federation of Korean Industries (FKI) in March, more than a half of them — or 50.5 percent — answered they did not have any investment plans (12.4 percent) or could not set plans (38.1 percent). As capital expenditure can define the future of a business, the management always takes extra care in setting investment plans. Yet large business groups competitively pledged their five-year investment plans. An executive of a large company said the management had to rack its brain to churn out a expenditure outline in a hurry.

What has spurred such an ambitious rush? Was there an invisible hand behind the push?

In June, Financial Supervisory Service (FSS) Gov. Lee Bok-hyun held his first meeting with bank chiefs since taking office. The prosecutor-turned-governor criticized banks for profiting from the rising interest rate environment. “Interest rates should be set by the market, but profit-seeking by banks through a widened gap in deposits and lending rates during the rising rate environment is drawing scorns,” he said. When his comment stoked an interventionist controversy, he said, “I do not have any intention of intervening with the market mechanism, nor can I (even if I want to).” He added he merely expressed the opinion as the financial regulator based on the Constitution and the Bank Act’s definition of the public role of lenders.

Banks responded quickly. Despite the fast gains in the base rate, banks competitively lowered their loan rates by expanding preferential rates while yanking up the rates for savings and deposits. “The move hardly had been voluntary,” said one bank official.

In July, the Financial Services Commission (FSC) announced an extension in the rollovers in debt of small merchants until after the end of September amid their virus-related hardships. Financial institutions after studying the insolvency risk were required to “voluntarily” allow a further rollover or grace in repayment in 90 to 95 percent of the debt held by small merchants. Despite the “voluntary” advice, banks more or less have been forced to extend the grace period to the self-employed on behalf of the government.

The Yoon administration had promised a radical lifting of regulations that have been stifling businesses and the market. After regulatory reform was set as a key agenda item by the government, a task force consisting of all economy-related ministries were formed for deregulation. Deputy Prime Minister for Economic Affairs Choo Kyung-ho stressed that the regulatory reform will be carried out continuously throughout the next five years.

Yet the business community and market complain that government demands and verbal intervention remain the same. The government vows to do away with regulations and state interference, but still flexes its muscle. Choo asked large company executives to refrain from big wage hikes as they could worsen inflation. The invisible pressure and unofficial remarks do equal harm on business activities just like regulations.

Companies cannot raise salaries to recruit skilled workers at home and abroad for their businesses, and banks cannot lift interest rates in line with the rises in the base rate so as not to anger the government. The government won’t share the responsibility for failures of major investment plans. The public and private sector must work together to fight hard times like this. But resorting to invisible regulations or pressure will only bring about greater harm. If there is a problem, the system should be changed.

Upon winning the March 9 presidential election, Yoon Suk-yeol pledged to restore free democracy and market economy and pave the way for unity and prosperity. Policymakers must go back to the commitments the president made just four months ago.