By Yoon Ja-young
Strategy and Finance Minister Choi Kyung-hwan has often stressed that Korea should not follow in the footsteps of Japan, which has suffered from an ultra-long recession dubbed the "two lost decades."
The new finance minister's economic policies are somewhat similar to those adopted by the administration of Japanese Prime Minister Shinzo Abe.
On top of the fiscal expansion and monetary easing, both "Choinomics" and "Abenomics" are focusing on household income as the key to economic recovery.
Believing that boosting consumption is crucial to overcome deflation, the Abe administration pressured businesses to raise salaries.
The Korean government, meanwhile, is planning to levy taxes on excessive corporate cash reserves, in order to stream the corporate gains into the household sector.
The country's top 10 conglomerates saw internal reserves, comprising profit reserves and capital surpluses, double during the past five years, while household disposable income has been stagnant.
The government therefore plans to give tax incentives for businesses if they increase wages or dividend payouts, while levying punitive taxes if they just pile up cash.
However, analysts doubt whether the indirect measure will be effective in ramping up household income.
"It is doubtful whether the dividend payout will notably increase the household income," said Moon Jung-hiu, an economist at KB Investment and Securities, pointing out that individual investors take only small stakes in conglomerates. Foreigners take on an average of 44 percent of the stake in the top 20 companies of the stock market.
He said that creating more quality jobs holds the key in this regard. "Wage takes 80 percent of the household income. Quality jobs are thus the most crucial, while dividends have limitations in boosting the household income."
The Japanese government, meanwhile, pushed businesses to raise wages, providing tax incentives as well. The economist said that the Japanese government estimates it succeeded in pulling up household spending by 0.2 percent.
He positively evaluated the effort by the Korean government to improve the sentiment. "The government set the foundation. Now, it is up to households and businesses. The indices will show later."
Lee Chang-seon, a senior research fellow at the LG Economic Research Institute, also doubted whether the indirect tax measures will lead to an increase in household income.
"I wouldn't say it will be ineffective. However, the problem is whether it will be as effective as we expect," he said.
First of all, he pointed out that it is a very hard decision for businesses to raise wages. "In case of wages, it has strong rigidity in a downward direction. You may raise wages because you are in a surplus, but once you do that, it is impossible to cut it back even if you later fall in deficit," he said.
He also pointed out that while corporate investment will help create jobs, businesses don't increase investment just because of tax policies. "The future growth potential and profitability are factors that make businesses determine to invest. They wouldn't make investment simply to avoid taxes."
He said that Abenomics is a partial success. "As a result of the fiscal expansion and monetary easing, the economy has shown signs of recovery. However, in the long-term, it needs structural reform and improvement on the supply side to get out of deflation. That's what the third arrow of Abenomics is targeting," he said.
He said it wouldn't be easy and will take time. "Korea is also facing risk of perennial low growth. On top of the short-term stimulus package, we need to get rid of the structural hindrances for growth, nurturing the growth potential from the mid- to long-term perspective," he added.
Strategy and Finance Minister Choi Kyung-hwan has often stressed that Korea should not follow in the footsteps of Japan, which has suffered from an ultra-long recession dubbed the "two lost decades."
The new finance minister's economic policies are somewhat similar to those adopted by the administration of Japanese Prime Minister Shinzo Abe.
On top of the fiscal expansion and monetary easing, both "Choinomics" and "Abenomics" are focusing on household income as the key to economic recovery.
Believing that boosting consumption is crucial to overcome deflation, the Abe administration pressured businesses to raise salaries.
The Korean government, meanwhile, is planning to levy taxes on excessive corporate cash reserves, in order to stream the corporate gains into the household sector.
The country's top 10 conglomerates saw internal reserves, comprising profit reserves and capital surpluses, double during the past five years, while household disposable income has been stagnant.
The government therefore plans to give tax incentives for businesses if they increase wages or dividend payouts, while levying punitive taxes if they just pile up cash.
However, analysts doubt whether the indirect measure will be effective in ramping up household income.
"It is doubtful whether the dividend payout will notably increase the household income," said Moon Jung-hiu, an economist at KB Investment and Securities, pointing out that individual investors take only small stakes in conglomerates. Foreigners take on an average of 44 percent of the stake in the top 20 companies of the stock market.
He said that creating more quality jobs holds the key in this regard. "Wage takes 80 percent of the household income. Quality jobs are thus the most crucial, while dividends have limitations in boosting the household income."
The Japanese government, meanwhile, pushed businesses to raise wages, providing tax incentives as well. The economist said that the Japanese government estimates it succeeded in pulling up household spending by 0.2 percent.
He positively evaluated the effort by the Korean government to improve the sentiment. "The government set the foundation. Now, it is up to households and businesses. The indices will show later."
Lee Chang-seon, a senior research fellow at the LG Economic Research Institute, also doubted whether the indirect tax measures will lead to an increase in household income.
"I wouldn't say it will be ineffective. However, the problem is whether it will be as effective as we expect," he said.
First of all, he pointed out that it is a very hard decision for businesses to raise wages. "In case of wages, it has strong rigidity in a downward direction. You may raise wages because you are in a surplus, but once you do that, it is impossible to cut it back even if you later fall in deficit," he said.
He also pointed out that while corporate investment will help create jobs, businesses don't increase investment just because of tax policies. "The future growth potential and profitability are factors that make businesses determine to invest. They wouldn't make investment simply to avoid taxes."
He said that Abenomics is a partial success. "As a result of the fiscal expansion and monetary easing, the economy has shown signs of recovery. However, in the long-term, it needs structural reform and improvement on the supply side to get out of deflation. That's what the third arrow of Abenomics is targeting," he said.
He said it wouldn't be easy and will take time. "Korea is also facing risk of perennial low growth. On top of the short-term stimulus package, we need to get rid of the structural hindrances for growth, nurturing the growth potential from the mid- to long-term perspective," he added.
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