By Lee Chang-sup

The booming economy has become a double-edged sword for President Lee Myung-bak. The more economy grows, the more the people feel alienated and polarized.

President Lee instructed the Cabinet Monday to chart an industrial ecology system whereby both small and big companies as well as the rich and the poor can prosper together.

His remark was a frustrated response to the way the general people are disenchanted about the economy.

The second-half growth rate of 7.2 percent is the highest in OECD. Except for China, all countries worldwide should be envious of the rate. In addition, Korea will record a trade surplus and a low inflation rate this year.

By the standard of the 1970s and 1980s, achieving three macroeconomic objectives—namely, high growth, low inflation and trade surplus—are the ultimate policy goals. Then the fruit of the growth trickled down into every nook and corner of the country automatically and democratically.

Such a stellar performance is, ironically, now a source of social tension here because of the existence of two economies.

As the two polarized economies co-exist, policymakers also have a dilemma on their hands.The first-tier group is comprised of chaebol and exporters. Samsung, Hyundai-Kia, SK, and LG grew by more than 30 percent. About 30 listed companies are expected to post record earnings in the second quarter. For this group, the government should adopt an exit strategy as soon as possible.

The interest rate should be raised further. Fiscal stimulus must be withdrawn. If possible, the Korean currency should gain value against the dollar. Economic overheating is worrisome for this group. They are the big beneficiaries of a weaker currency and a low rate. Despite the unprecedented boom, capital-intensive big companies are reluctant to hire additional workers.

Non-chaebol companies and the ordinary people belong to the second tier of the economy.

Small-and medium-sized companies are struggling to make both ends meet. Their bankruptcies are worrisome. About 40 percent of them are unable to cover interest expenses. Chaebol do not allow hikes of prices from subcontractors as they must provide the world’s most cost-effective products for global consumers.

Business conglomerates are hit for squeezing prices from subcontractors. Many households are tied to big debts. Their rush to borrow their way into buying homes has boomeranged now. Housing prices have fallen by 10-20 percent even in Korea’s most expensive area, Gangnam. Personal debts are at a record high. A hike in their income will not lead to additional consumption. They will recycle part of their increased earnings in repaying debts.

Construction companies have also been hit hard. Mom-and-pop shops are struggling as large firms set up franchised sales outlets near their shops. For this second group, policymakers have difficulty in raising interest rates, withdrawing fiscal stimulus and tolerating a strong currency policy.

Job increases will not be noticeable as long as small companies are struggling. The unemployment rate is serious especially among young people. For this group, deflation is a big concern. As their asset prices fall, they have little extra money for consumption. This is the vicious cycle of asset deflation.

In the neoliberal capital world, polarization is inevitable. Big firms become bigger, and the rich get richer. This widens the income gap.

Polarization has been deepening in the country. Before the currency crisis in 1997, the country was an economically egalitarian society. The booming economy widened the base for the middle class.

Workers were not serious about job security. Wages grew in accordance with the growth across the industries. No significant performance gap existed between exporters and domestic-oriented companies. The Gini Coefficient, the broader gauge of the income disparity, was low.

Following the imposition of the IMF economic retooling program in the nation, everything changed. Labor market flexibility replaced job security. Surviving chaebol became stronger now. Small companies are currently struggling. The middle-class base has weakened as income disparity widens.

Despite euphoria over the high-flying economy, policymakers need to pay attention to the latest crop of negative data.

First, the housing market is more serious than statistics suggest.

Second, the global economy is in a fragile situation. Korea's high-growth rate is attributable to China’s economic expansion. Many forecasts point to a downturn of China’s manufacturing output, the double-dip concern in the U.S. economy and EU’s tightening of fiscal spending.

Third, the debt of public enterprises has reached a worrisome level. Their debt will reach 300 trillion won by 2012, a three-fold rise in three years. To bypass the National Assembly for budget increase, the administration has mobilized LH Corp., the state-funded property developer, to refurbish four rivers. The insolvency of Seongnam City should not be a surprise. Many local autonomous bodies have incurred massive debts.

Fourth, the national health insurance fund will dry out this year. It means a hike for premium for the people. By 2024, Korea's per capita spending on medical expenses would be the highest in the world. The OECD has already alerted Korea on the need to reform the healthcare system.

Fifth, the National Assembly Budget Office reported an annual increase of nation's welfare budget by 17 percent from 2006 till this year. Unless restrained, Korea will encounter the same fate Greece is now locked in, in six years’ time. Welfare spending accounted for 20.2 percent in Greece in 2008. Korea's welfare spending will be 20 percent in six years, higher than 18.8 percent in Italy and 15.2 percent in OECD.

The office called for prudence in fiscal spending in view of the world's lowest birth rate and the quickly aging population. In addition, the unification cost would be enormous. Korea's government debt will reach 116 percent in 2050, a similar level to what the EU faces these days.

Sixth, the exit strategy must be prudent. When all countries do not raise their interest rate, Korea imposes a penalty on itself by making a rate hike. All in all, the success of Lee’s economic team will be dependent on ``depolarizing’’ the economy.

Lee Chang-sup is the chief editorial writer of The Korea Times. He can be reached at editorial@koreatimes.co.kr