Failed projections and policy bungles deepen crisis
The Korean economy is falling deeper and deeper into the mire.
Throughout this year, government economists said the economy might stay weak in the first six months but rebound in the latter half. With less than a quarter left, however, key indicators are heading even lower.
There are few hopeful data or figures. A Statistics Korea report showed Monday that domestic consumption in August dropped by the biggest margin in 41 months. It was the steepest drop since March 2020 when the nation began social distancing in earnest to prevent the spread of COVID-19.
Government statisticians said the sluggish consumption was due mainly to the reduced spending power of households, who were up to their necks in debt amid high interest rates. Yet the situation is unlikely to get better before it gets worse. JP Morgan Chase CEO Jamie Dimon, a top Wall Street banker, recently said that the world should prepare for a 7 percent interest rate.
Worse yet, even the nation's corporate debt ratio against its GDP is now higher than it was during the Asian and global financial crises.
All this leaves only the government, among the three major economic players able to bolster the sagging economy. The problem is the Yoon Suk Yeol administration will not play that role. When the government tries something, it does so in the wrong ways, running counter to global trends. Behind these attempts are the president's outdated economic perceptions and his incompetent and/or irresponsible aides.
A case in point is this government's undue emphasis on financial health. Yes, the rapidly increasing public debt is also a problem especially when interest rates remain high for a long period. Yet, everything is relative. Korea's household debt is among the world's highest in ratio and amount, and its corporate debt exceeds the level of the 1997-98 currency crisis. However, public debt against GDP is two-thirds of the OECD average, a quarter of Japan's, and less than half of America's in 2022.
The so-called composition of the debt also matters. The bulk of the government debt is tied up in long-term maturities and is not subject to quick redemption in times of crisis. They are also financial debts with corresponding assets, not deficit liabilities. In addition, the creditors - up to 90 percent of public debt - are Koreans, not foreigners.
All this shows that the debt should be seen within the broader context of its role in economic growth, people's livelihoods and social stability. Unlike households, fiscal stringency is harmful to the national economy, especially in a slump.
The president and his economic aides not only struggle to accurately predict half a year into the future correctly, but also tend to aim too far into the future. Also, it often seems as if these officials do not know what they are saying.
For example, Yoon says fiscal health is essential for future generations. Yet, his officials cut outlays to boost the birthrate in order to reduce budget deficits. At this time of global technological competition, the government downsized RandD spending, eroding future growth potential. The president recently declared the advent of the "provincial era," but fiscal authorities slashed the central government's grants to localities.
To revive the economy, this government tries to make people work longer at lower wages. However, pursuing economic growth through exploiting labor, both local and imported, has long outlived its efficacy. Instead of building a social safety network wider and closer, it tells wage earners and owner-operators to live on their own. Professor Chang Ha-Joon of the University of London, when asked whether Korea's economic policies are returning to the 1960s, said, "They are going back to the 1860s," the early stages of capitalism with no concept of welfare states.
Fiscal stability is a means and people's wellness is an end, like an alliance with other countries is a means and national security is an end.
Koreans remember the debate between presidential candidates early last year. Center-right candidate Yoon stressed fiscal stringency as part of his small government philosophy while his center-left counterpart called for more flexible spending.
Presidents often change their campaign pledges after the election, for better or worse. Many voters think Yoon's fiscal policy should be one of them.
Source: Yonhap News Agency