[Column] Preemptive — and aggressive — action matters

Without aggressive preemptive actions, Korea could not have survived the global financial crisis 25 years ago.

Lee Sang-ryeol

The author is an editorial writer of the JoongAng Ilbo. Former president Lee Myung-bak could be one of the most underrated Korean presidents. His name is usually at the bottom in popularity votes. He is resented by the liberals for the death of his predecessor and liberal-favorite Roh Moo-hyun during a prosecutorial probe during his term. May people also dislike him over the nationwide scare over the mad cow disease from Lee’s decision to lift the restrictions on U.S. beef. As a result, his achievements were often viewed poorly.

But his administration’s response to the 2008-2009 global financial crisis could be an exemplary case. The shockwave from a Wall Street meltdown spread around the globe. Governments hurriedly implemented unprecedented stimuli actions. But the results were poor. For instance, all G7 economies contracted in 2009. The U.S. economy fell 2.6 percent, and Germany and Japan 5.7 percent each. The average GDP decline for OECD member nations was 3.4 percent. But South Korea was able to report a growth of 0.8 percent.

In the following year, the Korean economy grew at a staggering 6.8 percent, far above the OECD average of 3.1 percent. The Financial Times on April 27, 2010 praised South Korea for pulling off a “textbook” economic recovery. South Korea weathered a crisis that battered most other countries.

Whether you like Lee or not, that’s a fact. But it did not occur by chance. The government under President Lee had been firm on its goal to turn the crisis into an opportunity. The briefings to the president by government offices for their annual plans were pulled up to December to front-load spending.

Then finance and economy minister Kang Man-soo described the government’s fiscal policy direction in three words — preemptive, decisive and sufficient. The International Monetary Fund and the OECD later attributed Korea’s survival of the crisis to the aggressive fiscal and monetary policy of the Lee administration. Other governments all had taken stimuli moves of cutting taxes, increasing spending and lowering rates. But Korea was faster and bolder.

Kang proposed radical incentives for research and development, including categorization of their R&D reserve up to 3 percent of sales as their cost; a tax credit on 10 percent of their investments in research facilities; and a tax deduction on 25 percent (6 percent for large companies) of their research expenses or a tax deduction on 50 percent (40 percent for big companies) of their research expense which exceeds their past four-year average. That kind of three-fold tax incentives from planning to research facility investment to actual research was the first case in the world.

When a lower official handling tax systems protested against the idea as it was unprecedented, Minister Kang pressed ahead with the package exactly because it was unprecedented and untried by other countries. At that time, design and human capital also were included in the R&D category. Korea’s R&D share to GDP — 2.9 percent in 2007 — was lower than Japan’s 3.3 percent. But the figure exceeded Japan’s by 2010, joining the world’s top with the share rising to 3.9 percent by 2012. R&D spending by big companies like Samsung Electronics and Hyundai Motor sharply rose since three-stage incentives were introduced.

Packaging tax benefit programs for facility investments in national strategic technologies like chipmaking has not gone well lately. The People Power Party’s special committee on chips proposed to raise the tax credit rate for large chipmakers to 20 percent. The rate came down to 8 percent after a study by the finance ministry but went back up to 15 percent from President Yoon Suk Yeol’s order. Yoon was right to meddle.

Some say the world is in a composite crisis, including the high-tech war. Korea’s chip domination is being challenged. Past crises episodes have offered lessons. Measures mimicking all other countries cannot ensure a victory. Without aggressive preemptive actions, Korea could not have survived the global financial crisis 25 years ago.