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Better watch the spending

The IMF and OECD support the kind of liberal economic policies Moon is promoting.
July 15,2017
The new liberal government appears to be too lenient in fiscal spending. As its focus leans more towards improving the distribution of wealth than driving growth, it inevitably needs to dig into public finances. The conservative opposition and scholars criticize its generous spending plan. They worry that thinning the public coffers amid a slow-moving economy could translate into burdens on the future generation.

Their argument has grounds given the spending plan of the administration under President Moon Jae-in. It proposes to raise monthly basic allowances for low-income senior citizens by 50 percent to 300,000 won ($263) and pay 100,000 won cash allowances for each child a couple has. It also suggests increased government subsidies for child day-care.

To finance Moon’s 201 welfare promises, the government would need a whopping 178 trillion won over the next five years. It hopes to generate more tax revenue through increases in effective tax rates on large companies and high-income earners. The news does not sit well with the conservative mainstream.

Moon will have to overcome their resistance. He will have to persuade them instead of arm-twisting. He must win them over by balancing his policies on both growth and wealth distribution. Former conservative governments of Presidents Lee Myung-bak and Park Geun-hye focused on deregulation to stimulate corporate investment. They removed some outdated barriers, but did not help create an environment that embraces a new industrial paradigm in the fourth industrial revolution era.

The economy still grows at a snail’s pace of below 3 percent and youth unemployment hovers at 23 percent. The president entered office with a promise to increase hiring. He has yet to respond to the business community’s demand for deregulations. He won’t likely embrace the request, as it reminds him of the past conservative governments.

His economic aides confirmed such a belief. The former conservative government tailored economic policy to promote investment. It expected both new industries and jobs to sprout if deregulation increased business opportunities. Unfortunately, the laws that could have supported the plan did not go through because the key services industry reform and deregulation-free zone acts were blocked by the National Assembly and labor unions.

They were no panacea, but still could have provided traction to a slow-moving economy. Samsung Electronics earlier this month opened the world’s largest semiconductor production line in Pyeongtaek, Gyeonggi. The case is a good example of the economic effect of a friendly business environment. The construction employed 12,000 workers a day over the last two years. Samsung Electronics will be spending 37 trillion won on the facility by 2021. Some 440,000 jobs will be added. The new production capacity will generate a lot of work for suppliers. It is wrong to underestimate the trickle-down effect.

But such a large facility investment has become rare in Korea. Most large manufacturers build new facilities overseas. Since more than half of their revenue comes from overseas, it is sensible to have production bases there. Even when regulations are lifted, companies that have left won’t easily return. As a result, household income and spending will stay stagnant.

Moon’s vision of generating growth through increases in incomes makes sense. He wants to make jobs for the young first with increased public-sector positions, and then add 810,000 jobs by converting contract jobs in the public sector to permanent staff positions. He wants to create incomes for the young generation and irregular workforce so they can stimulate growth through consumption. A state-run think tank believes income inequalities could ease and that the middle-income class may improve through such endeavors.

International organizations like the IMF and the OECD support such policies. They recommend more fiscal spending to bolster the social safety nets. But the public nevertheless must keep close watch over the spending.

Regardless of its wishes, there is a limit to what a government can do in a single five-year term.

JoongAng Ilbo, July 14, Page 28

*The author is an editorial writer of the JoongAng Ilbo.

Kim Dong-ho