‘747’ Project Undergoes Test

By Lee Hyo-sik
Staff Reporter

President-elect Lee Myung-bak has pledged to place a greater priority on strengthening Korea's growth potential through tax cuts and deregulation to encourage companies to expand investments in facilities and research and development (R&D).

Throughout his presidential campaign, Lee championed the so-called ``747 Vision'' a 7 percent growth, $40,000 per capita income and becoming the seventh largest industrialized country.

He pledged to achieve a 7-percent gross domestic product (GDP) growth per annum for 10 years and a per capita income of $40,000 by 2017 under his leadership during the next five years.

The former CEO of Hyundai Engineering & Construction also said he will push for a market-based economy, benchmarking policies of the United Kingdom and the United States, to turn the country into one of the world's seven largest economies.

Although Lee recently revised down the incoming administration's 2008 economic growth target to 6 percent from the previous 7 percent, citing record-high oil prices and other unfavorable external conditions, he continues to stress the need to enhance the country's growth potential through expansion of corporate investment and R&D activities.

``The incoming administration will actively consider introducing the negative system under which all business activities are permitted, except a few. Deregulation is the key to creating jobs and enhancing the country's growth potential,'' Lee said.

Taxes on Oil Products

He also said his administration will cut taxes on oil products and corporate income taxes, while easing rules concerning the real estate market.

According to the Hyundai Research Institute, the nation's economic growth potential fell to around 4.5 percent after the Asian financial crisis, and investment in R&D should be pulled up to stimulate it.

It pointed out that the growth pattern itself is seeing a structural change due to the slowdown in population growth and aging of the society, coupled with falling savings rates and sluggish facility investment. ``Facility investment, which saw an annual 12 percent growth from 1981 to 1997, has been sluggish, being a hindrance to the innovation-led economies,'' it said.

The investment in R&D accounted for 2.99 percent of the GDP in 2005. The ratio has constantly increased since the 1990s and is highly compared with the average in the other Organization for Economic Cooperation and Development member countries.

It pointed out that the growth pattern itself is seeing a structural change due to the slowdown in population growth and the aging of society, coupled with falling savings rates and sluggish facility investment. ``Facility investment, which saw an annual 12 percent growth from 1981 to 1997, has been sluggish, being a hindrance to innovation-led economies,'' it said,

However, Korea still falls behind developed countries in the sum total of R&D investment, the institute pointed out. It totaled $28.3 billion in 2004, far below the United States' $312.5 billion or $118 billion of Japan.

It recommended that the ratio of R&D to GDP should be raised to over 5 percent and that there should be incentives such as tax benefits, matching investments from the government budget, or creation of R&D complexes.

As part of his efforts to strengthen the country's ability to grow, the President-elect Lee has said he will ease regulations concerning business activities to encourage companies to expand investment and create jobs for higher growth.

In particular, Lee said he plans to relax rules on conglomerates' ownership of banks in a bid to strengthen competitiveness of the financial sector. Under the current law, non-financial companies are banned from owning more than a 4 percent stake in a bank.

Lee has said that the regulations should be removed, stressing they have resulted in discrimination against domestic investors, while foreigners are exerting greater influence on banks and other financial institutions.

``The overemphasis of the rules separating financial and industrial capital has strengthened the control of local banks by foreign investors, resulting in reverse discrimination against local investors. Now is the time to rethink such a policy,'' he said.

Lee also said easing the rules would create synergy by combining manufacturing and financial businesses, and help strengthen the competitiveness of local financial companies amid intensifying global competition.

Business groups have been arguing for years that removing the regulations limiting chaebol's investment in banks was necessary to stop growing foreign ownership.

Also, the President-elect has said he will abolish the law that prevents a chaebol unit with assets of 2 trillion won or more from making equity investments in an affiliated firm to help increase corporate investment.

Regarding easing of restrictions on industrial activities in Seoul and its adjacent areas, Lee has pledged to drastically reduce corporate regulations in the metropolitan area to allow businesses to set up plants and carry out other industrial activities in a bid to boost corporate investment and job creation.

Currently, only 14 types of high-tech businesses operated by local conglomerates are permitted to either build a new plant or increase existing facilities on a case-by-case basis. But foreign-invested firms with non-Koreans owning over 50 percent stake are allowed to do so for 25 different kinds of industries, including aerospace and optical fibers.

Over the past five years, the Roh Moo-hyun administration has made it difficult for large companies to expand investment in Seoul, Incheon and Gyeonggi Province, in the name of balanced regional development and environment conservation.

But many firms have moved their production facilities to China and other emerging Asian economies rather than relocate operations to provincial areas, contrary to the Roh administration's policy intent.

Property Tax Burdens on Homeowners

Also, to revitalize the sluggish real estate market, the President-elect Lee plans to relax rules to lessen property tax burdens on homeowners, while stabilizing the housing sector by providing more publicly-built homes. He said to help increase transactions, he will consider reducing capital gains taxes and transaction taxes.

Lee has said he will overhaul the comprehensive real estate tax levied on owners of high-priced homes and land.

The tax, first levied in 2005, applies a higher progressive tax rate on owners of homes worth more than 600 million won under the government-assessed price standard, to curb demand for luxurious apartments, especially in southern Seoul, and stabilize rises in property prices. Those holding land worth more than 300 million are also subject to the tax.

But the Roh administration has refused to relax the progressive real estate tax, saying only a small number of households are required to pay this year and most homeowners are exaggerating their burden.

Lee has said property prices should be left to be determined by market forces, saying that he will increase housing supply to stabilize home prices, shying away from the Roh administration's demand-side only policies.

leehs@koreatimes.co.kr