Government’s misdiagnosis aggravates economic problems

The 1997-98 Asian financial crisis was the severest economic difficulty Koreans have experienced.

However, the economy has returned to that time it seems, judging by the growth rate. Economic think tanks, local and foreign, forecast Korea’s economic expansion will remain in the 1 percent range this year and next, the lowest since the nightmarish period back in the late ’90s. This economic expansion is lower than Japan’s, marking the first reversal in 25 years.

Exports remain sluggish, hit by a slump in China, a country that buys one-fifth of Korea’s goods. Domestic consumption shows few signs of a revival as debt-stricken households refuse to loosen their purse strings. Uncertainties are preventing businesses from making investments. The property market is still in a bubble.

The slight turnaround to an expansion in the first two quarters is owed to what economists call “recessionary growth,” as imports fell more sharply than exports. The economy is mired in a swamp with no easy escape in sight.

Still, the government seems unwilling and unable to do anything about it.

Finance Minister Choo Kyung-ho, the economic czar of the Yoon Suk Yeol administration, repeats only that conditions will improve in the second half of this year. “Exports have bottomed out and are ready to rebound,” Choo told reporters on Wednesday. It seems that the deputy premier for economic policy might have bet on China overcoming its multiple problems. However, most signs indicate that the world’s No. 2 economy is likely to become worse before it gets better.

Some pessimists even predict that China will follow the path of Japan and its lost decades, a time of zero growth and deflation. We hope they are wrong for the Korean and global economy ― and security. The expectations placed on China’s “reopening” after its long and obsessive COVID-19 lockdowns, have turned into concerns about renewed “China risk.” What should Korea do now? It has long been a must to diversify export markets and find new growth engines regardless of what occurs to the giant next door.

What should come next?

The real problem is not the growth rate of the second half or a few years from now. The fundamental issue is strengthening Korea’s weakened growth potential, raising its global status, and making more people become wealthier. Does the Yoon administration have an economic blueprint for this?

Unfortunately, the answer is no. Yoon and his aides still stick to neoliberalist policies, unduly relying on markets and the private sector. They adhere to tax cuts and trickle-down effects of Reaganomics and Thatcherism, trying to solve 21st-century problems with 1980s remedies. Asked to grade the Yoon administration’s economic policies, Professor Chang Ha-joon of the University of London said, “I think they registered for the wrong course.” Many Koreans must have agreed.

The government’s adherence to fiscal soundness is correct.

However, the government’s debt ratio against the gross domestic product is among the lowest among OECD countries. In contrast, Korea’s household debt against GDP is the third highest in 47 major economies. What should the monetary flow be like? The government must pull down house prices further while fattening the pockets of workers to spend more. The government unfortunately goes in the opposite direction, easing mortgage rules while near-freezing minimum wages. The big hole in tax revenue stripped the government of the means to create economic stimulus and better redistribution, or the government voluntarily abandoned it.

Politics and diplomacy ultimately aim toward improving people’s wellness and security. Still, the incumbent government’s one-sided diplomacy has resulted in economic disadvantages. Koreans know the U.S. strategy to isolate China from the global supply chain has also hurt Korean IT companies and automakers. The Korean leader must point out these matters at the meeting with his American counterpart at Camp David this Friday.

Easing polarization in income and wealth requires a certain degree of bipartisanship if not national consensus. However, Yoon’s National Liberation Day speech deepened the divide between conservatives and progressives. Yoon and his aides must know the U.S. credit rating agency Fitch’s recent downgrade of the U.S. government reflected its political failure, not economic problems.

And Yoon and his aides must also realize that the voters’ sense of wellness, not their ideological views, will determine the winners and losers of parliamentary elections next April.