Economic policies of past eight years on chopping block

By Choi Sung-jin

A key campaign issue for the April 13 parliamentary elections is whether and how much has the Park Geun-hye administration bungled the Korean economy.

Indeed, the government’s economic report cards over the past three years -- or eight years including the Lee Myung-bak administration -- are far from good.

Koreans have known conservative administrations are good at “growth” while progressive governments focus on “distribution.” The two conservative governments of the past eight years, however, have produced little results even in growth, let alone distribution, experts say.

Between 2008 and 2015, for instance, Korea’s economy grew 3.1 percent a year on average, down 1.8 percentage points from the 4.9 percent in annual average growth recorded from 2000 to 2007 under progressive administrations. Last year, real economic growth stood at 2.6 percent, down from 3.3 percent in 2014.

It was also the first time the nation’s economic growth rate hovered below the global average for five years in a row. The experts acknowledge that the right-wing government started amid unfavorable conditions at home and abroad, such as the 2008 global financial crisis, aggravating income gap and swelling household debt. But they say the two administration’s economic policies to cope with these economic adversities have been less than satisfactory.

As a result, not only does the Korean economy grow very slowly but it seems to be mired in a long-term slump. According to the cyclical variations of the corresponding composite index of the past decade and half, which shows economic ups and downs during the period, there were three economic contractions and three recoveries since 2000. But the ongoing contraction has continued since August 2011, the longest business setback after Korea graduated its rapid-growth phase.

The employment market has grown even worse.

Interestingly, the jobless rates of industrial countries, including the U.S., the U.K., Germany and Japan, which had surged immediately after 2008, have been declining since 2010 but that of Korea has worsened starting in 2013.

The jobless rate of the U.S., for instance, peaked at 9.6 percent in 2010 and had since fallen to 5.3 percent last year. Yet Korea’ unemployment rate had remained relatively stable at 3.1 percent until 2013 but it jumped to 3.5 percent in 2014, 3.6 percent last year and to 4.9 percent in February. The youth unemployment rate in particular soared to 12.5 percent in that month.

The experts attribute the poor performances to the misdiagnosis of economic ailments and, as a result, the incorrect treatment of them.

As an example, they cite the fact that the two conservative governments have almost redoubled state debt while failing to stimulate the national economy because of their wrong policy of “welfare without tax increase.” That these governments formulated supplementary budget three times -- in 2009, 2013 and 2015 -- indicates that they made economic forecasts based on groundless optimism and had to make up for the void later. For the same reason, they incurred a revenue deficit from 2012 to 2014.

“Because the government’s fiscal policy fell into the traps of tax cuts or “welfare without new taxes,” state debts and budget deficits increased without successfully supporting economic growth or expanding public welfare,” said Prof. Hwang Seong-hyun of Incheon University. “To normalize fiscal policy, the government should first raise overall tax burden ratio from 18 percent to 20 percent.”

The potential risks to the Korean economy are also growing larger.

One of the biggest risks cited by major international organizations and credit rating agencies in common is household debt. Most of the advanced countries had experienced a surge in household debt for two decades in the run-up to the 2008 financial crisis amid the real estate boom.

But the U.S. and other industrial countries have reduced such risks through continuous deleveraging processes but in Korea, the risks have kept growing. Korea’s household debt against the gross domestic product has jumped 13.7 percentage points over the past eight years, to a record 77.4 percent as of the end of last year.

Private businesses’ debt ratio, which had fallen since the Asian financial crisis of 1997, has resurged since 2005 to reach 243.1 percent at the end of 2014. That was because the government lent money to marginal companies through state-run banks instead of forcing them to undergo stringent corporate restructuring, the experts said.

“Bubbles and debts do not disappear even though the economy recovers and the financial industry improves,” said Park Jong-kyu, a senior fellow at the Korea Institute for Finance. “In Korea, households borrow money not to spend it but to buy homes or repay existing debt. Exessive debts are suppressing both consumption and investment now.”