ED Economy in 2024
Korea must resolve polarization, secure growth engines
On Dec. 17, the London-based publication The Economist reported that the Korean economy performed second best among 35 mostly rich countries this year.
President Yoon Suk Yeol mentioned the report at a cabinet meeting two days later. “I think it recognized our efforts to restore a private sector-led, market-driven economy while maintaining a sound fiscal stance,” he said. The finance ministry released its translation to journalists.
It is good to see an influential media outlet give high marks to Korea Inc. However, one could not help but wonder how many Koreans would agree to such an assessment. The magazine based its ranking on five factors, including two inflation-related ones. The Bank of Korea’s preemptive interest rate hikes appear to have curbed price rises relatively well.
In a Dec. 15 story, however, the same weekly said Korea was 31st in per capita income but 47th if working hours are reflected. That means Koreans endured long workdays and fewer holidays to stay in the top-35 group.
Neither the president nor the finance ministry mentioned that article.
Understandably, the government would want to highlight stories favoring it in an election season. However, it is a different story if it shapes and carries out policies geared for elections. One of the latest cases is the proposal to raise the criteria of major shareholders subject to stock transfer taxes. Officials said the move is aimed at protecting minority shareholders by preventing year-end stock sell-offs by major investors to avoid taxes.
Retail investors might welcome the move in the short term. The stock transaction tax was also scheduled to be phased out in 2025 to be replaced by a financial investment income tax. The government seems to aim at two things with its latest proposal – gathering votes for the parliamentary elections next April and abolishing or sharply lowering the income tax on financial investments. However, that will enlarge the already huge tax shortfall, draining resources to support the economically vulnerable class.
Korean and foreign economists agree that tax cuts for big companies and wealthy individuals do not spur investments or spending. The consequent budget shortage makes poor people poorer, leaving them with less money to spend daily while shrinking domestic demand and slowing growth.
Yoon and his economic officials cite inflation and the IMF’s recommendation as the reasons for their fiscal austerity. Still, there are various ways for the government to address spending without triggering inflation. The IMF also makes mistakes, as it did in Korea and some other Asian countries in 1997.
Even this government’s market-driven economic management is often purely theoretical. For instance, finance ministry officials checked the prices of bread and instant noodles daily to keep their prices from rising. The government also froze power rates for households and telecom fees, returning to the administrative style seen half a century ago. The Seoul bourse has become a rare exchange that bans short selling. There will be more populist, campaign-oriented policies over the next three months.
However, voters can seldom find “unpopular” policies that reform Korea’s social and economic structures and secure new growth engines.
Yoon’s efforts to pursue labor, education and pension reforms have been sputtering due to his misperceptions and wrong approaches. As Korea falls behind in the fourth industrial revolution, including artificial intelligence, 450,000 highly-educated youngsters have given up looking for work due to a dearth of quality jobs. A reduced R&D budget, albeit rectified somewhat later, shows how short-sighted this government is.
A Japanese newspaper recently said, “Korea is finished.” A Korean daily also worried that Japan might restore its superiority over Korea in semiconductors in a decade due to a wide gap in their investments. The president and his aides should read these stories. The “Peak Korea” theory is based on three declines – per capita income, economic size and growth potential. Can this government prove them wrong by stopping the triple falls in production, consumption and investments?
Economic outlooks for the next year are hardly bright due to geopolitical risks, including two wars and elections in about 50 countries. A soft landing in inflation is also difficult to expect.
When the “misery index” – real inflation plus unemployment rate – grows worse from the previous year, the governing camp cannot win in an election. Many Korean voters are saying they feel so.