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Digging its own grave

Aug 16,2018
Since a year ago, I have been warning that progressives were attempting an unprecedented experiment on the Korean economy with their so-called income-led growth theory, which is highly risky as it goes against proven mainstream economics. The income-led growth championed by the Moon Jae-in administration has never been verified scientifically and empirically. The theory is closer to a dogma or ideology because its approaches to the economy are based on a moral framework and judgment of being right or wrong instead of being correct or false.

Economists think of the American Economic Review, the Quarterly Journal of Economics, and the Journal of Political Economy as scientists do Science and Nature. Various papers on the economy are debated and tested out in the journals. Over the last half a century, a paper on income-led growth has never appeared in these accredited journals. The concept has only been cited in the Cambridge Journal of Economics. Even Hong Jang-pyo, former senior secretary for economy, said it was an honor for him to see a concept he had argued as a non-mainstream scholar being adopted as a national policy.

Proponents of the theory call themselves post-Keynesians, but they are totally different from the New Keynesians, the legitimate followers of the Keynesian school. In fact, their ideas are closer to the Marxist school than the macroeconomic theories of John Maynard Keynes. Orthodox economic theory argues that wages are determined by supply and demand as well as marginal labor productivity. But the nonconformists claim that wages are the result of a struggle between workers and capitalists. If capitalists reap more fruits from economic progress than workers do, that is profit-led growth, they claim. But if workers take more rewards, it is called wage-led growth, they argue. They believe a raise in pay for the bottom-tier wage earners with a higher ratio of marginal propensity to consume would lead to growth in consumption and the economy. From their view, a 29-percent hike in the minimum wage over two years is in the right direction to give impetus to a slow-moving Korean economy.

But their belief is totally wrong. It is a basic textbook theory that an economy grows from an equation among capital, labor and productivity. In other words, additions of capital and labor or technological advances make the economy grow. The prescription of the Moon Jae-in administration — hikes in the minimum wage and a shorter workweek — wrecks the equation. If production costs go up due to higher wages, a company cuts investment or hiring. Diminished labor input from the shorter 52-hour workweek also could impair growth. A year-long experiment with income-led growth unsurprisingly caused catastrophe in terms of jobs and growth.

Moon has lately talked more about innovative growth. But that does not mean he has seen the light. Income-led growth is not just a policy for the liberal government. It constitutes its identity. The government has already pushed the hourly minimum wage up to 8,350 won ($7.39) from the beginning of next year, a 10.9 percent increase on the back of the 16.4 percent jump in this year’s rate. It brazenly ignored employers’ pleas for reconsideration. Instead, it pressed ahead with the cutting of the workweek to 52 hours from 68 hours despite outcries from companies. Regardless of the havoc wreaked on the economy, the liberal administration has no intention to stop its income-led growth drive.

The Blue House repeats a mantra that the economy is recovering and that more time is needed to see the positive effect of its income-led growth policies. But time is not on the government’s side. The worst is yet to come. The economy in the first half was shaken after the minimum wage increased by 16.4 percent against last year’s rate from January. In the second half, the economy would be further hit by the shortened workweek. The minimum wage hikes would aggravate the economy next year on top of a number of negative factors — the interest rate normalization in the U.S., a trade war between America and China, and fast ascension of China’s semiconductor manufacturers.

The liberals attacked the conservatives for their incompetency in economic management pointing to the poorer scoreboards for the economy under conservative presidents. The economy grew on average 2.9 percent under presidents Lee Myung-bak and Park Geun-hye, whereas it grew 5 percent under earlier liberal president Kim Dae-jung and 4.3 percent under Roh Moo-hyun. But the Moon administration better watch such attacks. It is uncertain if the economy will achieve a 2.9 percent growth this year. It is expected to further sink to the mid 2-percent level next year.

If Moon wants to revive the economy, he must listen to repeated advice from the International Monetary Fund and the Organization for Economic Cooperation and Development on reforming the labor market and regulations. The income-led growth policy stands at the opposite pole of such recommendations. The government cannot afford confrontation with unions that helped put the liberal camp in power. But if it adheres to an ideological experiment with the economy, it could cause doom for not only the economy but also for the left-wing. It must stop with this dangerous experiment.

JoongAng Ilbo, Aug. 15, Page 27