Trapped in the rigidity of numbers
Published: 20 Sep. 2023, 20:25
Chung Un-chan
The author, a former prime minister and former president of Seoul National University, is the chairman of the Korea Institute for Shared Growth.
The Korean economy is in a critical condition. The growth rate has slowed to the 1 percent range, and inflation runs above 3 percent. The red streak in the trade balance shows no signs of easing. The data has been flashing gloomy readings unseen for many years. On the microeconomic front, corporate profits have been drooping, while the delinquency rate at financial companies has been shooting up.
The structural problems are equally alarming as the wealth disparity is widening. Worse, the younger generation, who is responsible for the future of the economy, is lethargic and losing hope. There are evident signs that Korea’s growth engine may stop any minute.
What measures can the government use in the face of the sobering reality? It must first study the global environment and Korea’s particular conditions in the context.
Under the banner of a small government, the United States resorted to conservative fiscal policy and monetary tightening in the 1980s. After inflation was tamed, it shifted to monetary loosening after the 2008 subprime mortgage crisis. The policy again changed dramatically in the wake of the Covid-19 pandemic. The mix of aggressive fiscal role and monetary tightening has become a new norm. The policy is prevalent in Europe, too. Countries are striving to keep up with competition while trying to rein in inflation to lessen the pain on the people.
Korea poses as an odd man out. Next year’s budgetary outline suggests a lack of efforts to ameliorate pains for the people or stimulate sustained growth. Fiscal spending this year rose 5.1 percent against a year ago, but it actually fell from last year when accounting for the inflation rate and economic growth rate. The budget for next year was proposed to rise just 2.8 percent, which is below the inflation rate. The proposal to cut government subsidies for research and development in science and technology by 16.6 percent has also raised serious concerns.
Can such fiscal tightening help combat such hard times? How can the economy pick up on sluggish consumer and corporate spending? How can productivity go up when R&D spending went down? Can income disparity improve and young people gain hope when the government does not tend to the pains of the economically weak?
The budgetary outline suggests the government prioritizes its smaller-role creed over practicality and national interests by adhering to numerical fiscal guidelines. The fiscal rule of containing fiscal deficit and national liabilities from becoming too big against the GDP is important. Like personal accounts, a state account also must be watched so as not to lose credit. Given the astronomical stretch in fiscal deficit and government debt due to the pandemic and political populism in the past years, the argument to abide by fiscal rules to defend national credibility has strong grounds.
But, the government has lost consistency in its policy with corporate tax cuts and eased inheritance and gift taxes that can hurt fiscal integrity. Moreover, the percentage-based fiscal rule is not compatible with Korea’s conditions faced with structural challenges from low growth, polarization and demographic woes. The government policy must be more oriented toward sustaining the economy in the longer run instead of focusing on the digits on the debt figures.
Europe has done away with the practice of fixing the national debt-to-GDP ratio. Korea must follow the customary norm instead of numeric reading. Fiscal integrity can be achieved not by downsizing the government role, but by building a strong economy that can fuel tax revenue. Fiscal integrity will deteriorate if people’s livelihood worsens due to the small-government dogma.
But our policymakers today are bound by number-based fiscal rules to meet the small-government creed. The efficacy in macroeconomic policy hinges not just on policy consistency but also on the flexibility of policymakers and maneuvering in policy operation. In his book “The Scope and Method of Political Economy,” John Neville Keynes, the father of John Maynard Keynes, argues that political economy must be an “art” exercised on a broad understanding of the economy, superior assessment of information and data, and sensibility in policy direction. Korea also needs such capable policymakers who pay heed to empirical studies.
An outsized government should not be the alternative. Instead, the government must be “smart” to stay competitive in industrial policy and keep the country ahead in the technology contest. The government must build the necessary infrastructure, supply sufficient R&D fuel and reduce uncertainties to motivate companies to invest. It must provide a clear child care policy to prop up the fertility rate from the historic low of 0.78. It must offer direct and indirect assistance to the poor and weak to ease inequality and excite consumption.
The combination of aggressive industrial policy and inclusive policy is needed now more than ever. The government must not save spending and instead must stimulate growth for more tax revenue. It must not chain the economy with the dogmatic fiscal rule.
Translation by the Korea JoongAng Daily staff.
with the Korea JoongAng Daily
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