Moon urged to listen to more voices on policies
President Moon Jae-in speaks during a press conference at Cheong Wa Dae on Aug. 17, the 100th day since his inauguration. Moon is enjoying an unprecedentedly high approval rating, but his economic policies are raising concerns that they might undermine the nation’s growth potential and innovative entrepreneurship. / Yonhap
‘It could hurt economic growth well after President Moon’s term ends’
Since his inauguration, President Moon Jae-in has introduced a series of expensive policies to address ongoing challenges. Experts said that the economy will benefit from new programs in the short term but it could hurt growth in the long run after Moon’s term ends. The Korea Times interviewed four global economists on how such policies will affect the nation. The following discussion has been reconstituted based on separate interviews conducted through phone calls and emails from Aug. 14 to 21. ― ED.
By Kim Jae-kyoung
Rob Carnell, Asia-Pacific chief economist at ING Bank
Sohn Sung-won, professor at California State University
Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis
Anthony Michell, managing director of Euro-Asian Business Consultancy
Q: What do you think of Moon's social and economic policies requiring a huge amount of taxpayers’ money? Do you think his policies could undermine the vitality and growth potential of the South Korean economy?
Mitchell:
I think Moon needs a good briefing on the real economy of South Korea and how “income-led growth” should work, which includes raising incomes, profits and returns on investment to get the best policy mix. From a study I did recently for the EU, irregular work has many different forms in the Korean market and contract workers are just one category. In general his current policies will lead to a net loss of jobs in the private sector balanced by a growth of jobs in the public sector. In income-led growth, government spending is a transfer from the income generators, not new income itself.
Sohn:
In the short run, economic growth will benefit from the new programs generating additional jobs. There are concerns in the long run. Higher taxes could discourage savings and investments limiting productivity gains which are essential for long-term growth and job creation. A new thought to boost economic growth in the long-run is needed. One possibility is dismantling more regulations.
Garcia-Herrero:
I understand your concerns about his policies but I tend to have some sympathy for some, especially those concerned with pushing for freeing household income for consumption, which is the case for some of the welfare estate measures. Freeing household income here means that household income does not need to be spent on private education or health as more will be granted by the state. This is particularly true for working people as the goal is to improve income distribution. The reason for my position lies on the weak consumption figures that have been dragging down the Korean economy and which are a direct consequence of excess leverage by households.
Carnell:
In terms of spending policies, I think there is a balance to be struck in terms of populist spending and balancing the fiscal books. In recent years, a kind of fanatical budget balancing and austerity approach has been taken by many economies around the world, in an attempt to undo some of the fiscal damage and address structural tax revenue shortfalls that were uncovered by the financial crisis. Growth has, as a result, been very soft, and offsetting accommodative monetary policy has allowed productivity to stagnate, as unproductive businesses have managed to linger on.
The Korean economy has two critical "economic" problems as opposed to social problems and if these are not put first, social issues will become more difficult and costly as a proportion of GDP.
Problem one is productivity. As Korea is entering a period in which no net growth in the number of workers is easy, moving people from low productivity work, which unfortunately includes many government positions, to higher productivity work should be the priority. Problem two is the ageing economy. In the 100-point road map ageing is hardly mentioned whereas it is the problem facing the Korean economy as the number of dependents increases, dependents with relatively high costs in terms of medical care.
Q: Some are concerned that if Moon keeps pursuing these kinds of policies, South Korea will follow in the footsteps of some European countries suffering from fiscal crises as a result of excessive welfare. What’s your take on this?
Korea’s public finances are considerably healthier compared to some of the Eurozone economies that experienced a debt crisis, and there is therefore much more room for sensibly targeted fiscal stimulus in Korea.
But equally, with the economy growing only a shade below 3.0 percent year-on-year on a trend basis, the unemployment rate is low at 3.6 percent and relatively steady, and even the average growth of monthly wages at 3.5 percent is pretty good by international standards. Perhaps the most obvious question is whether any measures aside from productivity boosting policies are really warranted? If not, then the outcome is likely to be mainly felt through higher market interest rates, crowding out of private sector investments and jobs, and a stronger Korean won.
Among OECD nations, Korea's spending on social programs as a share of GDP is relatively low. Even if all the programs were to be implemented, Korea would still be below the OECD average. This does not mean that Korea should keep going on taxing and borrowing in order to spend the money. It could hurt economic growth in the long run well after President Moon's term ends.
Korea is still very far from European public debt levels ― about a third of that of European countries which is already over 90 percent of GDP on average ― so I would not worry about that. The problem is whether the money is being spent wisely. To me, support to avoid excessive income inequality is good ― basically education but also health ― but supporting champions and industrial policy is not.
As regards the plans to extend the benefits of medical insurance this is obviously necessary and the cost will be born by those in employment and businesses. Given the aging issue I think this is a fair trade off as rich and poor are already skewed severely by age and Korea has the poorest over 65s of OECD nations.
Q: Can you make some recommendations for Moon and his administration on this issue?
Still, Moon has not yet announced what to me would be the best policy Korea could introduce, which would also free household income, namely a much broader opening up of its economy to foreign competition. Too many oligopolies and vested interests still linger in the Korean economy, which reduces household real purchasing power. By opening up to more competition ― not only foreign but also domestic by the way, prices can be slashed freeing income from households. Moon’s social policies may be okay, but if not accompanied by liberalization policies that boost potential growth, they will not work as they will be unaffordable in the long run.
There is clearly an argument for more expansionary fiscal policy, and a more balanced approach between fiscal and monetary policies. But that spending has to be targeted at productivity boosting measures ― education, infrastructure and the like. Healthcare spending could possibly make it into this bracket, but only if it were to lead to an overall improvement in the aggregate health and vitality of the population. It is not clear that this is the principal goal of some of these policies. And, moreover, healthcare does have a reputation globally as a bottomless pit for government spending.
My recommendation to Moon is to engage in a wide ranging debate about some of the measures that the Trade Union federations are pushing for with the general public and the 3.5 million small business owners and a wider range of economists.
More members of the administration who are aware of the complexity of these issues need to speak out more clearly. Moon seems to have been influenced by the French engineers of the 35 hour week and he needs to see for himself the problems this has created in France and to recognize that this is not the right solution for Korea.
I assume these issues will be thoroughly debated in the National Assembly. In a nutshell, the legislators must decide how much trade off in the Korean society should be made between short-run benefits and long-term cost. One way to "Have Your Cake and Eat It Too" is dismantle over-burdensome government regulations. This might be one of the ways to lessen the costs of the stimulus on the economy.
Carnell :
Minimum wages too are not necessarily a bad way to boost public consumption, and address what, for many economies, has been a steady erosion of real earnings power for those on low wages compared to those with higher incomes. But while growing inequality is a genuine concern for some, there is also a limit to what minimum wages can do here, and above that limit, the impact is more likely to result in reduced competitiveness, job losses and aggregate earnings weakness, especially for those with low pay. Consequently, it is arguably safer to hike minimum wages in small increments to test these limits, rather than in hefty amounts. Only time will tell if those limits have been exceeded by these latest policy measures.
Pull quotes
Rob Carnell
“Government spending has to be targeted at productivity boosting measures ― education, infrastructure etc.”
Sohn Sung-won
“The legislators must decide how much trade off in Korean society should be made between short-run benefits and long-term costs.”
Alicia Garcia-Herrero
“If social policies are not accompanied by liberalization policies that boost potential growth, they will not work as they will be unaffordable in the long run.”
Anthony Mitchell
“If economic problems are not put first, social issues will become more difficult and costly as a proportion of GDP.