firmly in place has been confirmed through an abundance of historical evidence.
Lawmakers should take the initiative for the economic revival
All the governments around the world have been striving hard to boost their economy with unprecedented stimulus packages in the face of the worst global economic crisis unseen in decades. The U.S. subprime-mortgage loan crisis sent the global financial market into a freeze, which in turn brought a sharp economic downturn with shrinking international trade, falling industrial output and soaring unemployment rates.
In response, all the governments including the U.S., the European Union, and China have increased their fiscal spending massively while providing all the possible lifelines, including tax benefits, to protect and revive their domestic industries. Recent signs show that the financial markets have recovered much of stability but most people agree that the real economy will stay in a deep slump for a considerable time. Considering the severity of the economic downturn, each government will likely increase their spending further. South Korea is not an exception as the lawmakers from the ruling and opposition parties have wrestled with the government proposal of a record 28.9 trillion won supplementary budget at the National Assembly.
It seems every government has been adopting the Keynesian solutions to overcome the economic downturn: increasing spending at the cost of fiscal deficit and pumping up liquidity to boost effective demand. But if the government spends far more than its tax income and print money to increase liquidity, it may provide some easy and quick relief in the short term but could backfire in the end, causing another pain to the people and economy.
Although the remedy carries a risk of passing the present pain to the next generation and contracting the market economy as a result of an expanded government, it seems all of us are looking at the short-term effect of the Keynesian theory while ignoring the long-term side-effect. Some may say that the current economic crisis is so severe and urgent that we cannot afford taking time to select the best solution with the long-term effect in mind. But whether the government expansion is the only and best solution to the economic crisis is to be questioned.
Best remedy is to improve economic system and ease regulations
Given the world is facing the worst economic recession since the Great Depression of the 1930s, the Keynesian solutions may be useful to some extent. But there is more effective way for the government to boost the economic activities by individuals and enterprisers without wasting much of the taxpayers' money: that is deregulation. If the government improves the economic system that restrains the people's economic activities by means of deregulation, it would help us overcome the current economic crisis and moreover provide a sustainable and long-term growth engine to fire up the economy without much negative spill-over effects. Improving the economic system is the fundamental remedy to revive the economy. Furthermore, it would enhance our comparative advantage against other advanced countries in two ways. First, it may sound a paradox but since our economy is more heavily regulated than advanced economies and the regulations themselves are also too much complicated, deregulation would render more opportunities for growth. A good example is the service industry such as finance, education, medical care and tourism. Although the service industry is highly valued-added and creates more jobs, the sector in Korea is too small and segmented to contribute to the economic growth as much as in developed economies.
Our service industry is 60 percent less productive than the manufacturing industry and its proportion of the nation's gross domestic product (GDP) is only 57.6 percent, lagging far behind the 76.5 percent in the U.S. and the average level of 71.9 percent for the OECD member countries. The weakness has brought the service account in the international balance of payment into a chronic deficit every year. In 2007, the service account posted a deficit of $20 billion.
There must be various reasons behind the weakness of the service industry. One of the fundamental reasons is that the interest groups of professionals in each service sector have refused competition and industrialization in the name the public interest, calling for protection such as entry barriers and regulations. Therefore, if the government sets free the medical care, education and other service sectors tied by their respective interest groups and introduces the market principles, then it could seize an opportunity for additional growth without squandering the taxpayers' money.
Furthermore, President Lee Myung-bak has shown an unusually strong will to reform. Lee called for business-friendly reforms during his presidential campaign as he was well aware of the fact that our nation's regulations were too much excessive and complicated, well beyond the global standards. After taking office, he set up a special commission to improve the nation's competitiveness and pushed hard for far-reaching reforms across the board, easing regulations over business start-ups, the use of land, and development of Seoul and its surrounding areas.
The government ministries and agencies have also launched reform initiatives to amend rules and regulations under their jurisdictions that are not in line with the market principles or restrict economic activities. For example, the finance ministry has lowered the corporate tax rates to the level of our rival nations and is now working on a roadmap to develop the service industry. The Fair Trade Commission has drawn up a law revision to eliminate the ceilings for big businesses' investment in their subsidiaries, a hallmark of the reverse discrimination against local firms, and ease the tight control over the holding companies' scope of business. The Financial Services Commission has proposed a bill to allow industrial capitals to own more stakes in financial companies in an effort to drive the privitization and further development of local financial industry. The Environment and Labor Ministry has called for a revision to the irregular workers' law to prevent massive lay-offs.
The parliament should take the initiative for deregulation reforms
However urgent and critical, reforms cannot be successful only with the administration's efforts. The regulations to control the economy are written in a law, whose change is under the parliament's jurisdiction. Any laws proposed by the administration to make business-friendly environment and change the regulations lagging the global standards should be subject to the parliamentary deliberation and approval. In a normal situation, it is the lawmakers who should take the initiative and propose reform bills to lift any restraints over the economic activities and improve the economic system's competitiveness. Under the law of checks and balances, the administrative body is in charge of implementing the regulations and therefore, the government officials are usually reluctant to deregulation reforms that would reduce their own authorities.
Since any systemic reforms always entail law changes, it is not the government but the National Assembly who should come forward to overcome the present economic crisis and develop the competitiveness of our economic system up to the level of the developed countries. But the current situation is quite different. Even reform bills proposed by the government are put on the shelves at the parliament. The government-proposed bill to revise the law for irregular workers in order to prevent massive layoffs before the deadline in July but lawmakers is yet to be discussed at the legislation sub-committee. Lawmakers have not started a discussion over the revised law bills that the government submitted last November to rationalize the wealth transfer and gift taxes that are so exorbitant to prompt irregularities such as tax evasions and promote the underground economy. The bill to ease the regulations over the holding companies that would encourage large business groups to introduce the more transparent corporate governance structure and reduce the discriminatory problems has been delayed once from February to April. It may be put off this time again.
Professor Douglas North, the winner of the Nobel Economics Prize in 1993, always said that the most incomplete one among the so many kinds of markets is political market. It's a pitiful paradox that the market failure problems become most serious when the government is making new regulations to correct market failures. The reason is that politicians are inherently more interested in their own re-elections and their constituents than the national economy's long-term development.
But we're now in an economic crisis. Since our nation has favored state control over self-regulation and industrial concentration over competition, we have more chance to grow further through deregulatory reforms than any other nations. I hope the lawmakers to keep this in mind and contribute to the economy's revival by taking the initiative to change the restraints over the individual and business economic activities in a more effective manner than any other parliaments in the world.
By Hwang In-hak / Head of industry team at the Federation of the Korean Industries