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Macroeconomics neglected

Tightening requires good timing. If it is done too fast, it can kill a fragile recovery.
June 23,2017
Kim Dong-yeon, the Moon Jae-in administration’s finance minister and deputy prime minister for the economy, visited the Bank of Korea 13 days after taking office and dined with its governor, Lee Ju-yeol. The two did not elaborate on what they discussed, but said afterwards that the government and central bank share the same understanding of economic conditions.

President Moon’s economic agenda is to ramp up fiscal spending to increase hiring and accelerate growth. Kim has mostly overseen public finances as a career bureaucrat. He is an expert on appropriating spending — in other words, microeconomics not macroeconomics. His plan must be backed by monetary policy, which is macroeconomics. If the central bank, which is in charge of overseeing money supply and interest rates, keep a tight monetary supply, money will not trickle down to stimulate economic activities. Recent deputy prime ministers under former President Park Geun-hye — Choi Kyung-hwan and Yoo Il-ho — were mostly out of sync with the central bank. BOK chief Lee publicly scorned the government to act more aggressively in fiscal policy instead of demanding more monetary easing. Because fiscal and monetary policymakers were out of tune, the ample liquidity did not produce the desired effect on the economy and markets. Kim may want things to be different.

But a finance minister cannot make miracles on his own. Moon’s economic agenda is mostly micro-focused. It divides and subdivides. The work requires shrewd fiscal maneuvering. This is why the finance minister as well as the two vice finance ministers are experts on budgeting. There are no authorities on macroeconomics with long-term visions and the ability to coordinate money supply, interest rates, inflation and foreign exchange rates. The economic team on the presidential staff is similar. Economist-turned-policy adviser Jang Ha-sung is primarily commissioned to spearhead chaebol reform. Kim Hyun-chul, recruited from Seoul National University to help with the economic policy of the president, is a specialist in business management. He has studied Japan for a long time and is knowledgeable about how demographics affect the economy. He is weaker in macroeconomics. The chief secretary for economic affairs is yet to be appointed.

But international financial markets are too volatile for an administration without experts on macroeconomics. Even a Top Gun-type economics czar would have qualms amidst today’s perils on the international front. A clash between the United States and China over currency rates could resurface. The British exit from the European Union will start becoming more tangible from the second half. U.S. President Donald Trump frequently rattles the financial markets with his unpredictable policies and his “America First” mantra.

The shockwaves have already reached our shores. The U.S. Federal Reserve bumped up its key interest rate range by another quarter percentage point to 1.0 to 1.25 percent on June 14, placing it on par with the 1.25 percent benchmark in Korea. It will be trimming its massive bond holdings as a part of its quantitative easing program following the financial meltdown in 2008 by disposing of $200 billion to $300 billion within the year, a move that will push up long-term bond yields. That much tightening in liquidity can be as effective as a quarter-percentage-point hike in short-term interest rates. The BOK would eventually have to take synchronized action. Tightening requires good timing. If a move is made too fast, it can kill a fragile recovery. If it comes too late, the market could become anxious and the government’s agenda on hiring and reforms could stall.

Macro policy-making is like navigating in a perilous and unpredictable climate. The captain must be able to read the winds and waves while ensuring his crew is fully committed to their roles. He must be well connected on the international front to foresee changes in the winds. Shin Hyun-song, economic adviser and head of research at the Bank for International Settlements, and Rhee Changyong, director of the Asia and Pacific Department of the International Monetary Fund, are good candidates. Their service under conservative President Lee Myung-bak must not stop the new government from wooing them. They could lend their expertise on macroeconomics to the new government. Shin rejected President Park Geun-hye’s offer to be the BOK chief. It would be up the government to court him.

Our economic fundamentals are still good. But debt levels are dangerous. The economy is under multiple structural challenges from demographic weaknesses as well as escalating geopolitical risks. Without strong macroeconomics, microeconomic policies on hiring and reforms are not possible. Recruiting apt talents is the starting point.

JoongAng Ilbo, June 22, Page 30

*The author is a columnist of the JoongAng Ilbo.

Yi Jung-jae