firmly in place has been confirmed through an abundance of historical evidence.
Raising tax will not resolve polarization
The keyword in the Presidential New Year speech this year was ‘de-polarization'. He believes that polarization of the population has to be rectified because, if it were prolonged, Korea would have to undergo a long road of slow economic growth. No one will oppose the ‘de-polarization' of society; so our focus should be directed to ‘how'. This means that we will need to start with clarifying the cause of the social polarization, as this will be the clue that will lead us to the solution. President Rho has pointed only to the polarization as a phenomenon he is blinded to see how the situation has deteriorated from bad to worse.
Causal relationship between polarization and low economic growth
The polarization between the wealthy and poor that became increasingly visible since the Asian currency crisis but it has become more pronounced since the Participatory Government came to power. The average monthly income increase rate during 2003 and 2005 (Jan-Sep) shows that the bottom 20% of income earners saw a 7.9% income increase which was far lower than the 11.2% rise that the highest 20% income group experienced. The same goes for the income level. The total income of the top 20% was 7.1 times of the lowest 20% in 2003. The figure expanded 7.3 times in 2005. This polarization process was deepened by a long-term recessionaryeconomic performance that slumped underneath the level of the potential growth rate due to a bad state-management of the Participation Government.
Despite an unprecedented boom in export, the reason that the economic setback has perpetuated was directly due to sluggish domestic economic performance ?--low level local investment and consumption. As the strong export performance did not translate to the equipment and facility investment or increased consumer spending, a considerable opportunity loss took place in terms of income and employment, and the burden had to be largely borne by low-income earners.
A simplified calculation may help the understanding. Considering the size of Korea's economy (The gross domestic product in current market price in 2003 was 725 trillion won.) a 1% decrease in the growth rate means over a 7 trillion won worth of income forgone. With a wage proportion of 45% in the GDP, a 1% decrease in the growth rate per year would bring about a 3 trillion won of unearned wage.This means that 150thousand jobs, with the capacity to earn 20million won each per annum could have been created but are forgone.
Polarized performance between export and domestic sector is reflected on the income polarization between workers of these two sectors, and the domestic sector will have to bear most of negativity of the polarization in terms of income and employment.
Evidently, it is the slow economic growth that has exacerbated the polarization of the population and, thus, reversing the polarization process would require an increased economic growth rate. The Participatory Government is wrong in perceiving that a depolarization process will require emphasis on redistribution; President Rho's view that depolarization has to be based on a reform on the tax system is in line with that perception.
The reason that the economy has been going through the domestic spending doldrums since the outset of the Participatory Government is because the government led over-politicization and ideological division have shrunk investment incentives and entrepreneurship. Although it might seem complicated, economy boils down to ‘psychology', ‘flow' and ‘inducement'. Thus, market friendly policies that stabilize the economic psychology by minimizing uncertainties and let the economic resources flow smoothly are good enough. Plus, when regulations are relaxed so that individual entrepreneursmay easily grab market opportunities, incentives will return and the economy will be reinvigorated. The modus operandi: The polarization of economy shall be dealt through economic growth. However, we cannot hear such a view in the President's speech.
As an economy is cyclical, so are ups and downs in the growth rate. But an economic growth that continuously slumps under the potential economic growthrate is truly concerning. Although there needs to be a cool headed self reflection on the cause of this slow growth, the Participatory Government has been entrapped in self-rationalization as they insist, "instead of using a pump- priming policy we have achieved a ground for a sustainable growth by improving the over all economic metabolism." In the President's address, the economy is managed according to the principle, consistency, and the long-termplan. However, there is no evidence that the overall economic health has been improved in exchange with the slow growth. Nor, is it visible if any ground is prepared for sustainable growth by securing the future growth engine.
The word polarization needs to be used cautiously. Every society has the wealthy and poor --- there are rich people in Bangladesh and poor people in Kuwait. Instead of looking at the social polarization as a relative position of the two, the policy emphasis needs to be focused on improving the poor. Success of economic management is tested on whether the living standard of the low-income earners has been improved and their social mobility has been increased through time. The present policy of ‘depolarization'is a policy of dichotomization. By over-emphasizing on polarization, the government is under suspicion if it is forming antagonism in Korean society in order to make political gain.
Leftist economic management: Big government and small market
President Roh said it is nonsensical in many ways to argue if the present Participatory Government is leftist. His proof was the government budget, which, at 27 per cent of the GDP, is far smaller than that of advanced economies. But they cannothide the fact that the economic management of the Participatory Government is ‘left leaning'. Throughout history, the leftist has given unlimited trust on the human rationality. For the left, the human reason starts with capital ‘R'. For them, the market as a result of ‘spontaneous order'cannot appear but to be chaotic and immoral. They have been upholding a belief that, through a government organization based on the reason, the market shall be controlledand managed so that a moralistic and idealistic society can be designed. Following this intellectual fashion, the Participatory Government is aiming to become a big government. A big government cannot help but have a policy that aligns it with a small market.
Instead of a ‘small government', whenever there is a chance, the President has emphasized on words like a ‘working government' and ‘efficient government'. The primal cause of a big government is the expansion of services to the populace. But this is not all. The government role expansion is packaged as the ‘spirit of the age', which is to dismantle the extant structure based on the vested interests and to re-mold a new structure of growth and redistribution. ‘Balance', ‘Redistribution', ‘Equality', ‘Social Welfare', ‘Protection of the Weak' and ‘De-polarization' are the nucleus. The ‘moralistic, sympathetic and working government' has been bridling over the market on that basis. As long as the President feels sure about the ‘big government' concept, market and enterpriseoriented policies will be hard to come by. A big government lowers the spirit of the private sector.
The President said that when he looks at the long-term financial plan up to 2030, Korea will face an absolute lack of revenue resource, no matter how much the financial efficiency is increased and spending patterns are altered. He said that there is a limitation in cutting down of the budget and blocking tax leakage by increasing transparency in business transactions. "We need to find a fundamental solution", he made a very meaningful statement: He was presenting a ‘welfare state'. However, bench marking the budget management of matured western welfare economies while regarding Korea's economy on a par with them is rather unconvincing. Also all the countries that he mentioned in his speech were those that are struggling towards the ‘right', after going through the ‘pain'of governmental changes, in order to escape the situation where their economy had lost vigor and had been churning out a large number of unemployedcitizens--- due to the budget management paralyzed by the over-sized welfare spending.
The President's suggestion about job creation as a means of de-polarization was a justifiable policy concept. He pointed out correctly that, in order to create jobs, small and medium enterprises are needed to be stimulated, and in order to improve the employment chances of young university or higher degree holders, there is need to promote high value added service industries. What is clear is that jobs are created by enterprises. Jobs are of a typically derivative nature. This means that workers are needed only after a company has made business plans and investment decisions. And, a company only can make an investment decision when uncertainties are minimized and recruit new workers when the labor market is flexible. The task of a government is not providing jobs but helping ---- system-wise and policy-wise --- an environment to be established where jobs could be created. Thus, in the Presidential speech, there should have been a mention about how to vitalize the private sector. But instead, there was only an abstract and labor favoring advice; that the entrepreneurial side had to give up its interest bravely in order to bring about a great agreement between the employed and employer.
Employment of 130,000 people, which the President suggested as a way to create jobs, in the social service areas such as childcare, nursing, road safety and public security cannot be more than a band-aid, but is indeed very disappointing. The government sector may employ people. But the employment has to be justifiable in itself and recruitment shall not be made just to provide jobs. Since its outset, the Participatory Government has increased the number of public servants by 23,000. The wage paid to the public servants has increased up to 19.291 trillion won, up 13.5 % from 16.8 trillion won in 2003. Apart from the increase in wages, expanded manpower in the public sector goes against the deregulation trend. As the number of employee and size of the organization expands, the area that new government employees seek to cover will be enlarged. This has a high propensity to proliferate unnecessary regulations.
If human rationality were impeccable, freedom would be only a luxury. If there were an omni-potent man we only would have to follow his direction. As freedom is based on our lack of knowing, when freedom is permitted we can replace our lack of knowing with understanding earned from failures. The market is a place where individuals'interests collide. The limitation of human rationality is offset with the selection process in the market. The combination of ‘a big government and small market' is a very dangerous concept, which derives from over confidence in human knowledge. We need to examine what path those nations that chose the big government/small market combination followed in history. Increasing the tax and the size of the budget is no answer to de-polarization.
Cho, Dong-keun (Professor, Economics Department of Myung-ji University,