Paradox of Yoon pursuing market-driven economy while taming inflation

President Yoon Suk-yeol presides over an emergency meeting on economic issues at the presidential office in Yongsan District in central Seoul, Friday. Korea Times photo by Suh Jae-hoon

By Yi Whan-woo

• Published Jul 10, 2022 1:27 PM KST
• Updated Jul 11, 2022 10:19 AM KST

Some anti-inflationary measures raise questions over market intervention

By Yi Whan-woo

The Yoon Suk-yeol administration is pursuing a number of policies that seem at odds with his stated objective of “setting the market economy upright” as it pushes to tame the soaring inflation that is threatening people's livelihoods.

The dispute centers on proposals attempting to lower inflation directly through salary freezes, as well as indirectly by curbing wholesale electricity price increases to lessen the burden of financial losses at public corporation Korea Electric Power Corp. (KEPCO).

Other proposals are being seen as efforts to help support vulnerable borrowers, consumers and businesses hit hard by inflation. Banks have been reaping record earnings through lending, mainly due to their interest income following hikes in benchmark interest rates to tame inflation, so the Yoon administration is pressing them to lower interest rates for borrowers.

Meanwhile, as oil refineries are benefiting from skyrocketing global oil prices that have allowed them to sell their products at much higher prices than before, the Yoon administration is considering imposing a windfall profit tax on the refineries.

“The high inflation is mainly affected by external economic risks that remain out of the government's control, and I doubt whether its direct interventions to control prices will work,” one researcher at a state-run economic think tank said, asking not be named. “The government rather should focus on expanding financial support for low-income households and those who are especially vulnerable to inflation.”

The Yoon administration's anti-inflationary measures raised concerns about it intervening in private sector decisions about company wages, when Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho requested major business conglomerates to refrain from excessively raising employee salaries.

“Excessive wage increases do not only worsen the inflation situation, but also expand the wage gap between large companies and small- to mid-sized enterprises, which make workers at SMEs feel a sense of deprivation,” he said during a meeting with the Korea Enterprises Federation (KEF), June 28.

His comment came just days before inflation figures in June turned out to have increased by a 23-year high of 6 percent.

Choo, however, was criticized both for pointing his finger at large businesses for the high consumer prices as well as for placing the actual financial burden on the shoulders of salaried workers, although wage increases are less responsible for price growth compared to soaring energy prices, supply chain disruptions and other external factors.

Discussions are underway at the Ministry of Trade, Industry and Energy to put a cap on the wholesale price of reserve electricity produced by smaller and private energy companies and purchased by state-run KEPCO.

The retail price of electricity is determined by the ministry after considering the overall economic situation, which could end up with saddling the cost burden on consumers and energy-intensive industries.

“This (cap) can be seen as going against a market economy, especially considering that those wholesalers are not responsible for KEPCO's losses,” the same think tank researcher said.

He pointed out that the ministry has hiked the retail electricity price by 5 won per kilowatt-hour beginning July 1.

The increase marked the sharpest rise seen since a new billing system went into effect in 2021 intending to cope with soaring energy prices worldwide.

The increase was also aimed at capping snowballing losses at KEPCO, which reported a record quarterly operating loss of 7.8 trillion won ($6 billion) in the January-March period of this year.

Such a deficit follows a record annual operating loss of 5.9 trillion won for the public corporation in 2021.

Commercial banks are being criticized for reaping the profits of huge increases in interest income stemming from the widening gap between their rates for loans and deposits amid the record level of household debt.

As a result, Yoon and Financial Supervisory Service (FSS) Governor Lee Bok-hyun called on the lenders to ease the burden on borrowers.

“The president emphasized that the financial authorities and financial institutions must work together to ensure that the interest rate burden on consumers does not increase sharply at this time of rate hikes,” the presidential official said after Yoon gave the directive during a meeting with senior presidential secretaries, June 20.

Speaking before journalists, June 23, the FSS governor warned banks not to become too greedy as the policy rate climbs.

In a separate meeting with bank CEOs, June 20, he encouraged them to lower interest rates on loans to financially vulnerable people in order to help the economy achieve a soft landing.

The Yoon administration is facing calls from lawmakers to tax oil profits to broaden support for consumers.

The nation's four refineries _ SK Innovation, GS Caltex, S-Oil and Hyundai Oil Bank _ logged a record total quarterly revenue of 4.7 trillion won in the first three months of this year. Their earnings are believed to have increased in the second quarter as well, as crude oil prices are in an upward trajectory.

Calls for a windfall profit tax ― a tax on a company's extraordinary profits due to external conditions ― are gaining momentum here as, in the U.S., the Joe Biden administration is considering imposing a quarterly tax on oil and gas producers' profits in order to provide benefits to consumers struggling with skyrocketing energy prices.

The revenue would be siphoned off to consumers below a certain income in the form of a tax rebate.

“Many people can't afford to pay for gas while refiners are enjoying an oil price boom,” said Rep. Kim Sung-hwan of the main opposition Democratic Party of Korea (DPK). “The companies should be asked (by the government) to reduce their margins or share their profits in the form of a tax.”

Rep. Kwon Seong-dong, the floor leader of the ruling People Power Party (PPP), echoed this view.

“The refineries should not be the only ones who fatten themselves up during the era of inflation,” he said.