Anti-inflation combat

Fundamental, macroeconomic approach is answer

The government entered into an all-out war Thursday against one of the greatest threats to social stability: inflation’s attack.

That the Lee Myung-bak administration is really serious in its anti-inflation combat this time around was evidenced less by the myriad of price controls than by the hike of the key interest rate by the Bank of Korea.

Such a shift of emphasis from micro- to macro-economic policy tools was a step in the right direction. The government should maintain the course of action if it is to go anywhere. Unfortunately, one can hardly remain optimistic, given this administration’s track record as well as its main economic concerns.

Among the various measures decided at a Cheong Wa Dae meeting were a freeze of public service charges and college tuition, supply of more homes to help stabilize housing prices and rents, and crackdowns on price rigging and commodity hoarding by producers and consumers.

Reining in price spirals is crucial to protect the public livelihood, as inflation erodes their real income. The government’s strong-arm tactics, however, will be effective only temporarily, and come back as greater burdens on the general public. Take the compulsory curbing of utility rate increases. Unless the state electricity company tightens its belt and cuts costs, the reduced revenue will punch a hole in its bottom line, which will have to be filled with taxpayer money.

It is lamentable in this regard that the new head of the government’s anti-trust agency appears determined to put his priority on price controls, contrary to its main duty of encouraging free competition. Kim Dong-soo, the new Fair Trade Commission chairman, should know his blind loyalty to the President ― even by distorting the original role of the agency ― will harm, not help, his boss, economically and politically.

Equally questionable for the same reason was President Lee’s choice for new minister in charge of trade and industry. Choi Joong-kyung, who played a key role in failed exchange rate controls in the two currency crises of 1997 and 2008, is a believer in the artificial cheapening of the Korean monetary unit to bolster exports and help exporters, especially larger ones. His policy may not necessarily and entirely be wrong ― if we were living in the 1960s and ‘70s.

Lee’s appointment of these loyal but outdated officials seems to reflect the President’s ambitious ― increasingly unrealistic ― goal of attaining 5 percent economic growth rate while curbing inflation to 3 percent.

The current price surges are largely beyond the control of the Korean government, and any one government for that matter, coming from such global factors as flooding liquidity and soaring commodity prices. Far more so for Lee’s economic aides, most of whom are supply-side economists who try to bolster growth by tax cuts and the revival of construction boom.

Anything less than raising currency values and interest rates to appropriate levels would save the Korean economy from the looming specter of inflation.

We can understand why Lee adheres to growth, but the President should remember this is actually his last year, free of major elections, to normalize what has been distorted over the past three years. The economy is no exception.