Sharpen the edge, fuel reform, dump populism

Lessons must be learned from the economic mismanagement in the earlier half of Yoon’s term, as the latter half could be worse.

Two and half years ago, the Yoon Suk Yeol presidency was launched on the two pillars of free democracy and market economy. On the economic front, the presidential office and the government may take pride in the escalation of the economy’s rank through the president’s summit diplomacy, the conservative government’s self-restraint in fiscal spending and the debut of Korean bonds in the World Government Bond Index (WGBI).

If you look at the data, the Yoon administration’s economic performance was not so bad. The rise in the consumer price index that hit above 5 percent in 2022 has recently dived under 2 percent, enabling the Bank of Korea to shift away from its restrictive currency policy last month. Exports have been extending gains for the 13th straight month. The employment rate last month hit a record high of 63.3 percent while the jobless rate plunged to 2.1 percent, the lowest for September.

But the sanguinity cannot be found in the everyday economy. The strain from the mounting household debt and high prices of household goods dampen purchasing power. Domestic demand has become lethargic, generating little growth in the economy. Against a dismal growth of 1.4 percent last year, the GDP contracted 0.2 percent in the second quarter and edged up only 0.1 percent in the third quarter. The government inevitably would have to downgrade its annual growth estimate from its earlier 2.6 percent.

Policies were more disappointing. The government’s hands-off promise went out of tune with its populist actions. The flip-flops over taxing on financial investment income, changing other tax codes and drawing up a real estate policy only fueled confusion in the market. The extended oil tax cut and a freeze in household power bills also worsened the shortfall in tax collection and exacerbated the deficit of Kepco, the state-run electricity company. Meddling in the rate policy, caps on wireless bills and consumer good prices ended up distorting the market.

Lessons must be learned from the economic mismanagement in the earlier half of Yoon’s term, as the latter half could be worse. Fiscal spending cannot be relied on to stimulate domestic demand due to the tax shortfall for two consecutive years. Reinforcement in protectionist policies under Trump 2.0 may cause headwinds for our exports that are solely driving the growth of this country.

The government, enterprises and politics must work together to strengthen the efficiency and competitiveness of Korean products and industries to survive the intensifying competition on the international stage. Labor and education reforms should be expedited to improve our fundamentals. The government must forgo populist temptation to buttress fiscal health through outlay rationalization and better resilience against external volatilities.