By Nam Hyun-woo
The number of people expressing doubts about President Moon Jae-in’s economic blueprint of “growth led by increased income” is growing. Many pose questions over whether the policy suits the Korean economy.
After its inauguration in May, the Moon administration set up income-led growth as its economic policy goal and released a slew of packages such as boosting pay for the low income bracket, in the belief that their spending would jump-start the economy.
Many experts agree that income-led growth is based on demand-centric economics, developed by the British economist John Maynard Keynes. The theory advocates demand-led growth in which increased government spending will create more effective demand and jobs thus pulling an economy out of a recession.
Such an approach became the mainstream -- getting the U.S. economy out of the Great Depression and leading the post-war Golden Age of Western countries in the 1950s and 1960s.
But criticism emerged on its effectiveness because ballooning government debt and inefficient budget expenditure came to the fore. Some also worry that it may not offer a solution for the Korean economy.
They argue that raising public income cannot on its own stand as a growth driver and should be accompanied by innovation that sparks the economy from the supply side.
One example would be the emergence of the smartphone. A hike in the minimum wage does not create demand for iPhones. That can only be created after Apple created the iPhone.
If there is no innovation from the supply side, raising public income will remain as a short-term economic stimulus, not a long-term growth plan, they say.
“If the government focuses on only one side, there could be a limit in its effect,” said Rep. Kim Song-sik of the People’s Party during a parliamentary interpellation last month. “Boosting domestic demand through job creation or income hikes should come together with investments in human resources for economic growth.”
President Moon himself stressed the importance of “innovation-led growth,” saying it is one of two pillars for economic growth. So far, however, the government has not come up with detailed innovation-oriented policies, while its income-led growth strategy is under the spotlight.
Prof. Sung Tae-yoon of Yonsei University also said “it is not a long-term growth strategy but a short-term boost.”
According to Sung, both Keynes and post-Keynesian economists stressed the “multiplier effect” for the demand-oriented theory to work as a growth driver. This means that government spending should increase consumption and investment, which will further jack up the national output.
“In order for government expenditure to have a multiplier effect on public income, it is important that companies expand their investment,” Sung said.
Critics also point out that Korea’s marginal propensity to consume (MPC) may not be high enough to affect Asia’s fourth-largest economy.
MPC -- also a key part of Keynesian theory -- shows how much people spend out of their increased income. If the figure is not high, the effect of the raised income is limited.
According to Deputy Prime Minister Kim Dong-yeon, the low income bracket has a higher MPC than the high income bracket -- meaning those who earn less spend more from their raised income. This prompts the government to work on cranking up revenue from low-income families through measures such as a higher minimum wage.
According to professor Kim Dae-il at Seoul National University, however, it is difficult to find evidence in Korea for the government’s belief.
“The reality is very complicated,” he said in a seminar last month.
Adding another uncertainty is the characteristic of the Korean economy, which is open and small.
According to Sung, an income hike tends to drive growth in demand in closed economies; that is not the case for an open economy such as that in Korea. The country’s international trade is almost tantamount to its gross domestic product.
“In an open economy, a wage hike usually weakens an exporting company’s price competitiveness, while demand, which is decided on overseas markets, is not likely to improve,” Sung said.
Experts say that the way the government now plans to spend money -- hiring more civil servants or creating public sector jobs _ will not likely bring a multiplier effect.
“Creating such jobs require continued expenses -- such as a civil servant’s pension -- and this may drive market participants to predict an increased tax burden and shrink their consumption or expenditure,” Sung said.
What Sung talked about is the Ricardian equivalence proposition, which is named after British economist David Ricardo. He tried to show government expenditure funded by higher taxes will not have long-term effects.
In response, Keynes rebuffed such a negative prospect by saying: “In the long run, we are all dead,” and stressing the importance of near-term policies.
It remains to be seen which side is right and the cost-efficiency of Moon’s policies will also depend on this.