By Choi Sung-jin
“Recent gains in domestic demand are the results of government-led growth, which maximized fiscal spending. If the budget dries up, or fails to produce the desired stimulus effect, the growth rate is highly likely to plunge.”
That was the diagnosis of the Korean economy in a recent paper written by Professor Shin Se-don of Sookmyung Women’s University. His views drew attention for two reasons: first, it came on the heels of the government’s optimistic economic outlook. Second, the author of the thesis was once the economic tutor of President Park Geun-hye.
Last month, the Ministry of Strategy and Finance issued a press release saying the GDP growth rate in the third quarter was 1.2 percent, the highest in five years, and that the growth of domestic consumption ranked fourth among 23 OECD countries for which the relevant statistics were available. “The government’s swift policy steps, including stoking the housing boom, frontloading of fiscal spending and stimulating consumption, worked positively to reinvigorate domestic demand,” it said.
Yet Prof. Shin cautioned against hasty excitement with a single quarter’s economic record, citing the “base effect,” which makes a certain period’s economic record appear much better or worse than it actually is, depending on the performance of a year earlier. “If officials judge the overall economy with just the 1.2 percent growth in the third quarter and remain complacent with it, there are high risks of misreading the whole picture,” he said.
A look into the “content” of the growth shows it is led entirely by the government’s input of money, Shin noted. In detail, the 1.2 percent consists of 0.3 percentage points from government consumption, 0.7 percentage points from (government-initiated) construction investment and 0.2 percentage points from inventory investment, he added, saying, “If and when the government’s ability of public finance dries up, the growth engine will cool off anytime.”
Pointing to such negative factors as declining exports for five consecutive months and the lack of a new growth engine, Shin concluded, saying, “The Park administration, instead of worrying about a continuous drop of growth momentum since its inception, has been expressing optimism, presenting meaningless comparisons with other OECD countries. How can we anticipate any effective and fundamental steps that could turn around the economy to come from them?”