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Sun, July 3, 2022 | 03:05
Markets
[INTERVIEW] Time to go back to corporation-driven growth: economist
Posted : 2022-05-18 12:59
Updated : 2022-05-18 16:57
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President Yoon Suk-yeol delivers his inaugural speech at the National Assembly in Seoul, May 10. Joint Press Corps-Yonhap
President Yoon Suk-yeol delivers his inaugural speech at the National Assembly in Seoul, May 10. Joint Press Corps-Yonhap

Korea advised to reach currency swap agreements with US, Japan

By Lee Min-hyung

President Yoon Suk-yeol delivers his inaugural speech at the National Assembly in Seoul, May 10. Joint Press Corps-Yonhap
Shin Jang-sup, an associate professor of economics at the National University of Singapore
Korea's new government headed by President Yoon Suk-yeol should roll back a complex set of corporate rules, in order to allow big companies to expand investment and create more quality jobs, which a Singapore-based economist said will serve as a basis for overall economic growth here.

"The top priority is to build an environment where corporations can do business freely with reduced regulatory hurdles," Shin Jang-sup, an associate professor of economics at the National University of Singapore, said during a recent interview. Shin received his doctoral degree at Cambridge University in England, specializing in economic development and technological changes. He also worked as editor and editorial writer for Seoul-based Maeil Business Newspaper before joining the Southeast Asian university where he teaches about economic growth in East Asia and development economics.

"Companies stand at the center in the capitalistic system. When big companies grow, smaller ones are likely to grab a chance for growth as well. The government should place its policy focus on fostering corporate growth and driving such a virtuous cycle between big and small companies by minimizing its intervention in the market," Shin said.

President Yoon is known for being pro-business. The leaders of Korea's major conglomerates including Samsung, SK, LG and Hyundai were all invited to a dinner meeting celebrating his inauguration last week, which many critics called a display of Yoon's strong willingness to establish a business-friendly environment.

This direction is opposite to that of the previous Moon Jae-in government. Moon believed in what are considered distribution-based "anti-market policies" by reinforcing regulations and increasing corporate taxes, which ended up weakening investor sentiment here.

The Moon administration introduced its flagship income-led growth strategy by sharply increasing the hourly minimum wage from 6,470 won ($5.09) to 9,160 won over the five years of his presidency, thereby seeking to expand consumption and drive economic growth here.

Shin, however, argued that this decision was wrongheaded.

"Consumption comes only after people make money," he said. "The first step should have been on driving corporate investment, as this leads to job creation, expanded household spending and the overall economic growth."

President Yoon Suk-yeol delivers his inaugural speech at the National Assembly in Seoul, May 10. Joint Press Corps-Yonhap
Korea's conglomerate leaders applaud while participating in the inauguration ceremony of President Yoon Suk-yeol at the National Assembly in Seoul, May 10. From right in the second row are Samsung Electronics Vice Chairman Lee Jae-yong, Lotte Group Chairman Shin Dong-bin, Hanjin Group Chairman Cho Won-tae, Shinsegae Group Vice Chairman Chung Yong-jin, LG Group Chairman Koo Kwang-mo, Doosan Group Chairman Park Jeong-won, Hyundai Motor Group Chairman Chung Euisun and Kolon Honorary Chairman Lee Woong-yeol. Joint Press Corps-Yonhap

Shin also shared his viewpoint on corporate taxes.

"Reducing a maximum corporate tax rate is not a cure-all to boost corporate-led economic growth," he said. "My advice is to map out tax policies with the focus on the total sum of taxes collected from companies by providing more companies with an environment to earn more money through business activities."

He added, "But the former administration focused on collecting taxes by hiking the rate without building such an environment."

The Moon administration increased the maximum corporate tax rate to 25 percent from 22 percent over the past five years, which many have cited as the biggest stumbling block for corporate growth here.

"Each country has a different and complex tax policy, but the most ideal policy direction is for the government to build a less-regulated business environment, so more companies can make money. This will help the government collect more taxes from them in the end," Shin said.

Stagflation risks

The Korean economy is at a critical juncture amid fears of stagflation, when high inflation comes with weak economic growth. Korea's consumer price increase is feared to surpass 5 percent in the very near future, after hitting 4.8 percent in April. Economic institutions here and abroad are also revising down the country's GDP growth forecast down to the 2 percent range.

The Bank of Korea (BOK) and the U.S. Federal Reserve are also increasing their key interest rates rapidly, as part of their preemptive efforts to tame inflation and normalize monetary policies from the economic shock of the pandemic.

The won-dollar exchange rate is on the sharp rise. The won closed at 1,288.6 won per U.S. dollar on May 12, nearing a level last seen during the global financial crisis in 2009.

Shin advised the Yoon administration and the monetary authority to sign currency swap agreements with the U.S. and Japan in a timely manner, pointing to the Korean economy's heavy reliance on exports.

"Korea is vulnerable to external risks, as the economy is driven by exports relying on imports of raw materials and intermediate goods, so it is crucial for the government to preemptively manage such lingering risk factors in this period of financial volatility," he said.

"Toward that end, resuming currency swap deals with the U.S. and Japan is crucial," Shin said.

The BOK and the Fed reached a currency swap deal worth $60 billion back in March 2020 amid the escalating financial uncertainty sparked by the COVID-19 pandemic. But they did not renew it at the end of last year. A similar deal between Korea and Japan also expired in February 2015 and they have not resumed it amid the frayed bilateral ties.

'Blind optimism'

The economics expert also underscored the importance of staying away from blind calls for corporations to engage in social actions such as environmental, social and corporate governance (ESG) practices.

ESG has emerged in recent years as one of the most frequently mentioned keywords among companies here and abroad, with major influential institutional investors bringing it up in their investment agendas.

"Companies need to push ahead with their businesses with free and independent decision making," Shin said. "But blind optimism on ESG is feared to hamper the process. We are not living in a socialist country, so companies should remain free to choose their own values and methods of doing business within the limits of the law."


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