KoreaToday MBnomics in Soul-Searching Mode
By Lee Hyo-sik
Staff Reporter
President Lee Myung-bak was elected as the CEO of Korea Inc. in December last year on his pledge to jumpstart the slumping Korean economy through deregulation, tax cuts and other pro-growth policies. But in the face of surging oil prices, a global economic slowdown in the wake of the U.S. financial market meltdown and other negatives, the former CEO of Hyundai Engineering & Construction has not been able to move his bulldozer forward over the past seven months.
Public protest against the resumption of American beef imports, a nationwide canal project and many of his flagship policies have also made it difficult for President Lee to ease regulations, privatize public firms, cut taxes and push for other big name economic items.
The unfolding Wall Street crisis triggered by the subprime mortgage defaults last summer and its negative ripple effects across the globe have dealt a decisive blow to Lee's growth-focused and market-friendly approach, forcing him to shift priority to stabilizing the economy through inflation control, currency market intervention and increased regulatory oversight of the financial market.
During the presidential campaign, President Lee pledged to put the economy on a high-growth track, championing the ``747'' plan, which aimed to achieve 7 percent economic growth, increase per capita income to $40,000 within a decade and make the nation the seventh largest economy in the world.
He first engineered the won's depreciation against the dollar to boost exports and improve the current account balance. But the weak won policy soon backfired as it raised costs of international crude oil and other imported commodities amid soaring prices, putting a heavier financial burden on businesses and households.
In light of increasing public criticism against this foreign exchange policy, the government adopted a strong won policy by selling dollars on the currency market, depleting the nation's foreign exchange reserves and making it more vulnerable to outside shocks.
President Lee also backtracked from his earlier pledge to privatize the majority of over 300 state-invested companies in the face of public opposition. He then promoted green growth ― the achievement of sustainable growth without environmental damage ― an unusual move for a person who made his career in the construction industry.
The former Seoul mayor promised to slash various taxes and scrap regulations to help boost domestic consumption and encourage businesses to expand investment and create jobs. But his government has not lifted restrictions on industrial activities in the metropolitan area, while moving to further tighten rules on the financial market in the wake of Lehman Brothers' bankruptcy and a rise in the number of troubled U.S. financial institutions.
Also, Lee had vowed to scrap a range of regulations on the real estate market, including the comprehensive property tax, to revive property transactions and help struggling construction companies. But he has not delivered such promises as the majority of voters are against market deregulation.
The President has been promoting the construction of new satellite cities as the most effective way to increase housing supply in Seoul and its adjacent areas, departing from his earlier pledge to ease restrictions on the reconstruction of old apartments in southern Seoul.
He changed his stance as the idea of relaxing rules on reconstruction was politically unpopular among the majority of voters as it could benefit only a few wealthy homeowners.
President Lee had vowed to create a more business friendly place for foreigners but the nation has become a more unfavorable place for foreign businesses. Foreign investors have dumped local stocks and bonds worth billion of dollars this year along with the deteriorating global financial market conditions. Also, inbound foreign direct investment has fallen dramatically over the past few years.
He had also pledged to put top priority on the ratification of the Korea-U.S. free trade agreement (FTA). But he has not been able to do so because other politically popular issues have sidelined the trade pact and the governing and opposition parties have failed to narrow their differences over it.
Strong won policy to tame inflation
Strategy and Finance Minister Kang Man-soo, President Lee's chief economic advisor, was intentionally pulling down the won's value against the dollar to increase the nation's outbound shipments for higher growth and to improve the current account balance.
Kang continued to stick to the weak won policy even though it raised import costs of raw materials, pushing up the already high prices of goods and services here. But faced with intense public criticism against the foreign exchange policy, President Lee dismissed Vice Strategy and Finance Minister Choi Joong-kyung in July to save Kang, holding Choi accountable for the weak one policy.
Then, the nation's top economic policymaker shifted his currency policy priority to strengthening the local currency's value against the greenback to lower import costs and thus rein in rises in consumer prices here. But contrary to the government intent, the won-dollar continued to soar, forcing the government to intervene on the foreign exchange market.
Along with the Bank of Korea, the ministry sold billion of dollars out of its foreign exchange reserves and issued foreign exchange stabilization funds in July and August in an attempt prop up the won's value. However, the dollar continued to gain ground against the won as foreigners dumped stocks and bonds here, and took money out of the country in the wake of the international financial market turmoil.
The government's currency intervention depleted the currency reserves, making Korea more vulnerable to outside shocks, when foreigners took dollars out. The dollar shortage forced local companies to increase borrowing from overseas, hiking the nation's external debts.
Despite falling global oil prices over the past month, President Lee continues to maintain the strong won policy, citing commodity prices could resume an ascent any time. But his blunder in the foreign exchange policy has cost the nation dearly as businesses and households have suffered from higher consumer prices and a widely fluctuating won-dollar rate.
Privatization of state firms taking backseat
During the presidential campaign, President Lee criticized state-run companies for their inefficiency, pointing out that they were operating without proper supervision and that their size had become excessive. He said state enterprises have focused only on increasing the number of employees, while neglecting to boost profitability and organizational efficiency.
He had vowed to launch an outright privatization of over 300 public companies in an attempt to differentiate his administration from the previous Roh Moo-hyun government. But his administration has decided to privatize only a handful of state-run firms in the face of strong protests from the public who were concerned about hikes in the cost of utilities and other services.
A series of recent demonstrations against the decision to resume U.S. beef imports did not help the administration either, preventing it from proceeding with the privatization of public companies and other reforms.
In August, the government announced its first-phase privatization plan for 41 public organizations. Under the scheme, 27 state-owned enterprises, including the Korea Development Bank and Industrial Bank of Korea, will be privatized while the Korea National Housing Corporation and Korea Land Corporation will be merged. The remaining 12 public enterprises, including the Korea Tourism Organization, will be restructured.
The following second-phase scheme targeted only 40 state-owned companies mostly through restructuring and reorganization. The finance ministry plans to soon announce the final step for the privatization of public firms, but many expect it to be not much different from the first two.
Promotion of low-carbon, green growth
In a nationally televised address on Aug. 15, marking the 60th anniversary of the national foundation, President Lee said the government will promote ``low carbon and green growth'' as the nation's new vision, abandoning its 60-year long manufacturing-based and export-oriented growth approach.
He said Korea will shift its growth paradigm to an environment-friendly and energy efficient one to both achieve sustainable economic growth and protect the Earth, adding it will develop and make the best use of green technology and clean energy as future growth engines.
It was a dramatic shift from Lee's earlier high-growth and export-oriented 747 plan, a centerpiece of his presidential election campaign. He abandoned it soon after he took the nation's highest office amid unfavorable internal and external conditions, including soaring oil prices and deteriorating global financial markets.
The government had to lower the initial growth target of 7 percent for this year to 6 percent, and then below 5 percent in the wake of sluggish private consumption, corporate investment and slowing exports.
To create more jobs and overcome challenges from climate change and high fossil fuel prices, Lee said the government will build 10 more nuclear power plants by 2030 and raise its reliance on alternative energy sources five-fold in order to wean itself from fossil fuels.
It seeks to increase the portion of non-fossil energy sources from 4.6 percent of projected overall energy needs at present to 11 percent by 2030, while making nuclear power plants responsible for providing 59 percent of energy needs, up from the current 36 percent
He pledged to make every effort to help the nation achieve ``independence'' in the energy sector by increasing its energy self-supply ratio from the current 5 percent to over 50 percent by 2050.
Continuation of balanced national development
During the presidential campaign last year, President Lee promised to nullify the Previous Roh Moo-hyun Administration's balanced national development plan, stressing he would not discriminate against Seoul and its adjacent areas in favor of provincial regions. He said he would scrap restrictions on industrial activities in the metropolitan area to improve the business environment here and discourage companies from moving to China and other emerging economies.
However, Lee has changed his mind, apparently under political pressure, and has now become a champion of balanced national development, continuing his predecessor's controversial scheme.
Early this month, the government unveiled a plan to divide Korea into seven economic blocs and assign each with one or two leading industries as part of efforts to promote balanced development and turn the nation into a globally competitive business hub.
To do this, the government plans to spend 25 trillion won out of state coffers and attract another 25 trillion won from the private sector over the next five years, implementing 30 development projects aimed at expanding roads, railways and other infrastructure, as well as nurturing talented manpower.
The 50 trillion won scheme immediately invited criticism that it could further hike prices of goods and services by increasing the money supply, worsening fiscal soundness and doing more harm than good to the economy in the long run.
Critics say the multi-billion dollar development projects are just the latest politically-motivated scheme to improve the Lee administration's standing with the public, discarding its earlier pledge to develop the nation based on market principles.
Against this backdrop, Gyeonggi Province Governor Kim Moon-soo who has been calling for deregulation for development projects in his province criticized President Lee for hesitating to proceed with his campaign pledge, which was to deregulate his province.
Backtracking on deregulation
Even though the government and the governing Grand National Party GNP early this month unveiled a 26 trillion won (about $23.6 billion) tax cut package for the coming five years in a bid to revitalize the slowing economy, they have not been able to deliver another core policy pledge, deregulation.
Lee had promised to ease the ownership of banks by conglomerates and the cross-subsidiary shareholding among chaebol affiliates to encourage businesses to expand investments and create jobs. But Lee has not been able to do so in the face of strong opposition from the public. Now he is posed to place more stringent rules on the financial market in the wake of the Wall Street crisis.
President Lee had also promised to relax the heavily regulated real estate market and lessen property-related tax burden on homeowners. The government has announced a series of plans to ease capital gains and property tax regimes, but it is unsure whether they will materialize as even some GNP lawmakers, not to mention opposition party members, are against them.
During the presidential campaign, Lee had pledge to ease rules on the reconstruction of old apartments in Seoul to provide homes to places in which people want to live, shunning away from the previous Roh Administration's policy of building satellite cities outside capital city. The policy shift baffled many prospective homeowners and the construction of more resident towns is putting further downward pressure on sluggish home prices and hurting builders.
Sideling foreign friendly policies & KORUS FTA
President Lee had vowed to create a foreigner-friendly residential and business environment here to attract more inbound investments and turn Korea into a global business hub. However, it is increasingly turning out to be hollow slogan as more foreign businesses have exited the country this year.
Coupled with the global financial market meltdown, international investors have dumped local stocks and bonds, and taken dollars out of the country, destabilizing the domestic equity and foreign exchange markets. Additionally, Korea has been seeing its inbound foreign direct investment fall over the past few years because of the nation's rigid labor market and negative public sentiment toward foreigners among others.
According to the Bank of Korea, the country's net FDI ― inflow minus outflow ― stood at minus $886 million in the first half of this year, meaning that investors withdrew more money than they invested. This was the first net outflow since 1980 when the central bank started compiling related data.
Inbound foreign investment will likely continue on a downward curve in the wake of the global financial market meltdown and the consequent global economic slowdown, clouding President Lee's plan to transform Korea into one of the most open economies in the world.
One of his top policy priorities is the ratification of the Korea-U.S. FTA, which has been stalled at the National Assembly for more than a year. He had said as a presidential candidate, his administration will place top priority on the approval of the trade pact to build closer ties with the world's largest economy and help the nation enter the ranks of the advanced economies.
But in March, Lee committed a major policy blunder by resuming U.S. beef imports in a bid to make it easier for the trade pact to be ratified by the U.S. Congress. But his decision angered the Korean public who were concerned about health risks from possible mad cow disease. He paid high price for his mistake as it led to a series of mass candlelit vigils in Seoul from April to July, making it almost impossible for his administration to push for the FTA ratification at the Assembly and other major policy items for the time being.