'Central banks can't print babies'

ADB Institute dean advises on policies to boost economy

By Yoon Ja-young

Governments around the world use monetary and fiscal policies to maintain economic growth, but they become ineffective when their countries faces the problem of an aging population.

Korea should thus focus on structural change, promoting female participation in the labor market and adopting performance-based payment, according to Naoyuki Yoshino, dean of the Asian Development Bank (ADB) Institute.

“Following the implementation of monetary policy, the economy goes well and wages go up. Those who are working at companies will benefit since their salary will go up, and they will consume more,” he said in an interview with The Korea Times.

“All people who are receiving pensions and social welfare, however, are outside of the effect of monetary policy. If that population becomes bigger, then the effectiveness of monetary policy diminishes.”

The professor emeritus of Keio University visited Sejong to give a special lecture at the KDI School of Public Policy and Management for its 20th anniversary.

He said that the mainstream U.S. economics could not understand the problem stemming from an aging population since they are not facing such a problem thanks to immigration.

“That’s why Japan’s monetary policy did not do enough. Japan started implementing a zero interest policy, but it didn’t work either. Then Japan started quantitative easing, which means the money supply has been increased. Now it is negative interest policy. All those monetary policies are not very effective because of the aging population,” professor Yoshino said.

He cited an economist who pointed out that central banks can only print money, but not babies. “Japan’s problem is structural. The Korean economy’s long-term problem is just like Japan, an aging population,” he added.

Korea is facing an unprecedentedly rapid pace of aging. Korea is categorized as an aged society as senior citizens aged 65 or older now take up more than 14 percent of the population. The ratio is expected to surpass 20 percent in 2026.

He said that Korea should learn from Japan which wasted time sticking to monetary and fiscal policies without tackling the fundamental problem.

“Korea first should increase females in the labor force. Also, wages have to be based on productivity rather than seniority. Japan’s problem is that as one gets older their salary goes up, regardless of productivity.”

Regarding the current administration’s policies over income-led economic growth, which tries to increase household income and thereby pull up economic growth, Yoshino said it would only affect the working population.

The government plans to open doors to immigration to tackle the problem of the aging population, but Yoshino said society needs thorough preparation for this, citing terrorism in Europe.

“If Korea and Japan want to open their doors to more foreign workers, they should help them integrate into society,” he said.

He also suggested Korea, China and Japan should coordinate in developing the Northeast Asian economy. He said that as manufacturing powerhouses, they can create a big market together in the region.

“On top of the free trade agreement (FTA), free flow of capital is also very important. In order to do this, however, China has to change its basket exchange rate policy,” the professor said.

He said Korea’s government debt could become a problem if it goes beyond domestic savings.

“Japan had very huge savings. If domestic savings can support government debt, that’s fine. If domestic debt is beyond domestic savings, then it would become like Greece because they have to borrow from outside,” he said.

“It is the same with the 1997 financial crisis in Korea and Thailand. They borrowed too much from abroad. If the debt goes beyond that limit, Korea would have to borrow from abroad, and that is very dangerous.”