On Thursday, the government unveiled the economy management plan for the second half. Minister of Strategy and Finance Bahk Jae-wan said the government would put the policy focus on stabilizing the livelihoods of ordinary people. To this end, Bahk said, the government would tamp down on inflation, create jobs, boost domestic demand and strengthen the social safety net.
The government’s new economic blueprint comes against the backdrop of rising inflation. As consumer prices continue to surge beyond the target range, making life more difficult for ordinary citizens, it is right for the government to put priority on easing their hardship.
The government seeks to improve the livelihoods of low-income people by stimulating sagging domestic demand. The new plan enumerates 30 policy tasks aimed at rejuvenating domestic demand-oriented sectors. These projects are part of the 108 ideas tossed around at a two-day brainstorming session President Lee Myung-bak had last month with 88 ministers, deputy ministers and senior presidential secretaries.
The 30 tasks are mostly aimed at providing support for SMEs and small retailers at traditional markets that depend on domestic demand. They also include measures to deregulate key service sectors, including a renewed push to allow the establishment of for-profit foreign hospitals in the free economic zones.
But these steps are unlikely to stimulate domestic demand significantly. For one thing, the government’s overriding priority is to bear down on inflationary pressures. This means the government is in no position to increase spending to stimulate domestic demand. As a result, it relies on measures that do not require fiscal spending. But such measures have limits in boosting domestic demand.
For another, the government lacks the ability to promote deregulation of the service sectors such as health care and education, which have great job creation potential. Since its inauguration, the incumbent administration has announced five service sector advancement plans. But all of them have been gathering dust on the shelf since their announcements due to the government’s inability to coordinate conflicting views among ministries and interest groups.
Another reason why we cannot pin much hope on the government’s measures is that they are all aimed at treating the symptoms rather than tackling the real cause of the problem.
At the heart of the problem is deepening economic polarization. While the rich get richer, the proportion of the poor increases as the middle class dwindles. Polarization has worsened under the incumbent government, partly due to the global financial crisis that broke out in 2008 but more because of the growth model Lee introduced.
Dubbed “MBnomics,” Lee’s growth strategy benefited large exporting corporations by maintaining both the Korean won’s value and interest rates at low levels. It also put in place other business-friendly policies. As a result, the exporting sector boomed.
But the boom came at the expense of the domestic demand-driven sector, which consists of mostly SMEs and service providers. Households, particularly low-income families, also suffered as the macroeconomic policy mix fueled inflationary pressures and household debt growth in the midst of worsening income distribution.
Lee’s exporter-friendly policies without doubt helped Korea get out of the global recession ahead of other countries. But they have at the same time deepened the division of Korean society along diverse fault lines.
In this respect, any attempt to improve the lives of ordinary citizens should involve measures that can ease polarization, which in turn calls for a modification of the export-led growth strategy. But thus far, the government has shown no intention of mending it.
Korea has difficulty shifting to a growth model that would ease polarization without impairing its growth momentum. The difficulty is only natural, given the risks involved. Furthermore, the rise of a new approach calls for the abolition of old institutions and the establishment of new ones, which takes time.
But the longer it takes Korea to shift to a new growth strategy, the worse its problems would get. Hence it’s time for the nation to make serious efforts to draw up a new development paradigm. A good starting point for this project may be a serious review of the key assumptions of MBnomics.
