elect Roh’s Economic Policies to Undergo Major Surgery
By Lee Hyo-sik
Staff Reporter
President-elect Lee Myung-bak of the Grand National Party (GNP), who portrayed himself as a ``Leader of the Economy'' during the election campaign, has pledged to lower taxes and scrap regulations to create a more business-friendly environment, putting growth before wealth redistribution.
Once inaugurated as the President on Feb. 25, Lee is expected to move economic policies in a different direction from that of President Roh Moo-hyun. The framework of Roh's economic policies will undergo major scrutiny, analysts said.
The most controversial post-election issue is expected to be his moves to cut real estate and various other taxes. On top of cuts in property taxes, Lee has pledged to cut taxes on oil and corporate income taxes. Analysts said that Lee's economic policies could ignite conflict with some economic ministries.
Lee has also said to achieve higher economic growth, the former CEO of Hyundai Engineering & Construction plans to carry out large-scale development projects, including the construction of cross-country canals, and ease rules concerning the real estate market. The former Seoul mayor promised to fight anti-corporate sentiment, deregulate rules concerning business activities and attain economic growth of over 7 percent.
Analysts suggest that the president-elect should put greater priority on strengthening the country's growth potential through expansion of corporate investment and research and development (R&D) activities, rather than on pursuing construction and other infrastructure-based projects that tend to have a short-term and limited impact on the economy.
747 policies
Throughout his presidential campaign, Lee has championed the so-called ``747 Vision'' ― 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.
Lee 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.
In order to attain such goals, the president-elect promised to cut maximum corporate taxes from 25 percent to 20 percent, as well as those on gasoline and other oil products by 10 percent.
In a presidential debate last week, Lee said he and his party are pursuing a small government, adding if the government becomes smaller and functions more efficiently, it is not difficult to cut taxes.
He also said the country can create more than 600,000 jobs if its economy grows 7 percent, and plans to nurture competitive small-and medium-sized enterprises (SMEs).
``The jobless rate has increased and the livelihood of low-income households has deteriorated. If elected, I will ease regulations and create a business-friendly environment to encourage companies and investors to expand investment and create jobs,'' Lee stressed.
Canal project
He has also promised to construct a nationwide waterway to ease logistics and transportation problems, adding the 540 km cross-country canal network will create up to 300,000 new jobs.
Lee said the 540 km cross-country waterway, one of his flagship pledges, will cost 15 trillion won over four years but it will cut transportation costs and facilitate balanced national development.
He has been comparing the canal plan to his previous project renovating the Cheonggye Stream, a job thought to be implausible until he pulled it off as Seoul mayor. ``The canal will connect Seoul to the southern port city of Busan. It will also significantly reduce logistics costs and emissions, as well as help prevent disasters and utilize water resources.''
However, Lee's political opponents have said the canal construction project is not suitable for the environment, and is an outdated growth model. The United New Democratic Party (UNDP) and its presidential candidate Chung Dong-young criticized Lee's cross-country waterway project, calling it economically unfeasible and environmentally damaging.
``It will be difficult for Lee to continue to pursue the canal project as public opinion is against it,'' LG Economic Research Institute (LGERI) research fellow Lee Cheol-yong said.
He said the construction project will likely create many jobs and boost business activities in provincial areas for a short period of time. ``But what the country needs to do is to enhance growth potential by increasing productivity and generate decent jobs on a sustainable basis.''
Pro-chaebol policies
The former Seoul mayor has pledged to ease regulations concerning business activities to encourage companies to expand investment and create jobs for higher growth.
In particular, his support for the easing of rules to allow chaebol, or family owned large business groups, to own banks has invited criticism from his political opponents and others opposing conglomerates' ownership of banks.
Business groups have been arguing for years that removing the regulations limiting chaebol's investment in banks was necessary to stop growing foreign ownership, while banks and civic groups say that it will hamper the growth of the financial industry and allow groups to use their financial arms as ``piggy banks.''
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 in a local forum last month.
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.
Under current regulations, non-financial firms are not allowed to hold more than a 10 percent stake in a bank. Even if they do, they are only allowed to exercise voting rights of up to 4 percent. Such restrictions were put in place to prevent chaebol, including Samsung, from controlling commercial lenders.
``Public opinion had been tilting toward allowing conglomerates to own banks on expectations that it would encourage large business groups to expand investment and create jobs. But the ongoing Samsung scandal has caused many to worry about the possible side effects, discouraging attempts to lift the investment regulation,'' LGERI's Lee said.
He said to strike a balance, the new administration will likely allow local businesses to own and exercise voting rights of up to a 10-percent stake in commercial lenders as foreign investors. ``The president-elect will ease investment regulations step by step over an extended period of time,'' Lee said, ruling out a complete scrap of the rules.
Easing of real estate rules
The former Seoul mayor has also pledged to relax rules on the real estate market to lessen property tax burdens on homeowners, while stabilizing the housing sector by providing more publicly-built homes.
Lee has said he will overhaul the comprehensive real estate tax levied on owners of high-priced homes and land to mitigate property tax burdens on households, as the number of homeowners subject to the tax has increased sharply over the past few years.
He said he will lower the comprehensive tax rates on those who own only one home if elected.
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.
This year, the number of individuals and businesses subject to the comprehensive estate tax rose 38 percent to 486,000 from a year earlier on steep gains in home prices last year. Also, the tax was estimated to have increased to 2.86 trillion won, up 65 percent.
The government also levied the comprehensive tax on 68,000 households that own only one home, up 116 percent from 2006, drawing strong protest from single-home owners.
But the current administration has vowed to keep the progressive real estate tax intact, 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 Moo-hyun Administration's demand-side only policies.
LGERI's Lee said the president-elect will first check public opinion about the easing of the real estate comprehensive and capital gains taxes. ``It is certain that Lee will cut property holding and capital gains taxes to help the sluggish housing market. But the drastic relaxation of taxes will be unlikely because of negative public sentiment toward outright deregulation,'' he said.