Finance Minister Choi Kyung-hwan last week announced his third stimulus package since taking office in July to help boost the economy. Markets have remained skeptical about its effectiveness ― with good reasons.
The stimulus calls for frontloading 3 trillion won ($2.6 billion) in fiscal expenditure in the first half of this year and raising an additional investment of 7 trillion won from public and private sectors throughout the year.
If implemented as envisaged, these plans seem to be far short of what is needed to bolster the Korean economy, which has churned out alarming indicators in recent months.
Facility investment by companies and retail sales shrank 7.1 percent and 3.1 percent, respectively, from the previous month in January. Exports, the main growth engine of Asia’s fourth-largest economy, showed on-year contractions in the first two months of the year.
Announcing the latest stimulus, Choi, who concurrently serves as deputy prime minister for economic affairs, adhered to his view that the economy was showing signs of gradual improvement. He said action should be taken as economic gains were not solid enough.
Choi’s diagnosis, however, appears inconsistent with the symptoms of the flagging economy.
Last year, his economic team put forward two stimulus packages designed to inject 46 trillion won into the economy, which was coupled with rate cuts by the central bank. These efforts, which fell short of exceeding market expectations, managed to keep the country’s economic growth in 2014 at an unimpressive level of 3.3 percent.
It is doubtful that the latest stimulus, which was preceded by the Bank of Korea’s decision earlier this month to cut its key rate to a record low of 1.75 percent, will give a significant impetus to bolstering the economy.
It can hardly be expected that spending 59 percent of the budget, up 1 percentage point from the originally targeted 58 percent, in the first half will produce a substantial effect. The goal for increasing investment will be out of reach without cooperation from companies.
In addition to calls for more investment, Choi has recently urged businesses to raise wages and employ more workers. Though not in an explicit way, the top economic policymaker and his aides have also put pressure on the BOK to reduce rates.
The public has an increasing impression that the government is passing the responsibility for reinvigorating the economy to the central bank and corporations without doing all they can and should. The economic team led by Choi needs to pursue whatever stimulus policies are conceivable in a bolder fashion.
What is needed most urgently is the drastic elimination of regulations. During a meeting attended by President Park Geun-hye a year ago, pledges were made to reduce the number of government regulations by 10 percent by the end of last year. So far this year, however, only 3.1 percent of regulations have been scrapped. In service sectors such as health care, tourism and finance, more regulatory measures have been introduced.
While presiding over a meeting that convened last week to discuss ways to promote trade and investment, Park reiterated the need to reduce regulations to attract more foreign investors. She should tighten the reins to force her officials to let go of their regulatory powers.
It is also necessary to take measures to encourage long-term investments of the estimated 800 trillion won currently in short-term floating funds. A crowdfunding system also needs to be introduced and drastic tax incentives should be offered to investors in promising start-up companies, as in other advanced economies.
