One year after,'Choinomics' fizzling out

The Korea Times

The Korea Times

Finance

Wed, September 27, 2023 | 21:35

Economy

One year after,'Choinomics' fizzling out

Posted : 2015-07-14 16:41

Updated : 2015-07-14 21:47

Stimulus steps without structural changes seen ineffective

By Choi Kyong-ae

The aggressive stimulus package initiated by Finance Minister Choi Kyung-hwan with a fanfare a year ago has fallen far short of boosting the economy, analysts said Tuesday.

The expansionary policy, dubbed "Choinomics," was meant to stimulate sagging corporate investment and consumer spending. Expanded fiscal spending, easier rules on mortgages and the central bank's rate cuts have helped buoy the property and stock markets in the past year.

However, the policy failed to provide any substantial boost to domestic spending as consumers are weighed down by a heavy debt burden, they said.

"Household debt has now reached 1.1 quadrillion won, or more than 60 million won per household," said Lee Phil-sang, a visiting professor of economics at Seoul National University. "Even if home prices rise further, consumers are unlikely to increase their spending."

Three out of 10 companies have difficulty paying interest on their borrowings from banks even if they make an operating profit, he said. "In short, they are on the verge of going bankrupt due to worsening demand," he said. "It is a tall order for them to make investments."

Kim Sang-jo, an economics professor at Hansung University, said there should have been "structural changes" to buoy the economy, not a stop-gap measure such as the $39 billion fiscal stimulus package unleashed in August last year.

In structural changes, tax breaks should be given to companies that increase wages and higher taxes should be imposed on cash reserves at Korean conglomerates such as Samsung Group and Hyundai Motor Group, analysts said.

This month, the government announced a 22 trillion won stimulus plan, including a 12 trillion won supplementary budget, to handle the fallout from the deadly Middle East Respiratory Syndrome (MERS) and an unprecedented drought. But the move is also seen as falling short of reviving nearly moribund demand because the package will largely be spent compensating for damage caused by the two.

"What we really need is the right analysis of the current economic status quo," Lee said.

"The government needs to focus on generating a growth engine and then injecting money, if necessary. But the incumbent government chose to inject money first without coming up with a long-term growth plan. It also urged the central bank to cut rates four times (since August last year) to be in line with its expansionary policies."

Korea's benchmark interest rate is at a record low of 1.5 percent.

The Bank of Korea (BOK) projected Korea's economy likely grew 0.4 percent in the April-June quarter, down from growth of 0.5 percent a year earlier. Last week, the BOK lowered its growth outlook for this year to 2.8 percent from its April forecast of 3.1 percent. The Ministry of Strategy and Finance also cut its growth outlook to 3.1 percent from 3.8 percent.

The Greek debt crisis and the outbreak of MERS in May largely weighed further on consumer sentiment in the second quarter. Affected by slowing demand from China, exports plunged 10.9 percent in May — the biggest fall in six years — from a year earlier, the BOK said.

cka@ktimes.com