Lee In-ho, Next President of the Korean Economic Association: "The Moon Administration's Direction Is Correct, but the Problem Lies in Prescriptions Different from the Causes"

Policy Feedback Analysis... Need to Precisely Identify Causes

Respond to Rapidly Changing Market and Continuous Structural Reform

Loosen Rigid Labor Market Flexibly

Professor Lee In-ho of the Department of Economics at Seoul National University is being interviewed by Asia Economy on December 20. / Photo by Moon Ho-nam munonam@

[Asia Economy Reporter Jang Sehee] Professor Inho Lee of the Department of Economics at Seoul National University, who has been appointed as the next president of the Korean Economic Association, advised in an interview with Asia Economy on December 20 last year that the Moon Jae-in administration needs to flexibly revise its existing economic policies rather than stubbornly sticking to them as it enters the latter half of its term.

Professor Lee, an expert in game theory, pointed out that when the government’s intended policy effects do not materialize, the policies should be promptly reviewed. Regarding the current government real estate policy, he did not hesitate to criticize it as "offering a remedy unrelated to the cause," likening it to "applying a red medicine to a stomachache." He especially advised that continuous structural reforms are necessary to respond to rapidly changing markets due to technological innovations such as the sharing economy, emphasizing the need to "ease the rigidity of the labor market."

Professor Lee will lead the Korean Economic Association starting mid-February. The Korean Economic Association, established on November 30, 1952, is the largest economic association in Korea. The following is a Q&A with Professor Lee.

Interview by Kang Heejong, Head of Economic Department

- Please evaluate the economic policies of the Moon Jae-in administration, which has passed the halfway point of its term.

▲ The direction of the Moon administration’s three major economic policies (income-led growth, fair economy, and innovation-driven growth) is not problematic. The term "income-led growth" is more appropriately expressed as "distribution." When distribution improves, demand itself increases. However, if distribution improvement means dividing 1 by N, the market does not function. In a market economy, maintaining balance is important. It was good to continuously raise the minimum wage to help improve distribution, but raising it by 20-30% over two years suddenly caused chaos. Both conservatives and progressives agree that technological innovation is necessary. However, policies to realize technological innovation were not efficiently established. The structural issue of coexistence between large corporations and small and medium enterprises is much more complex than currently discussed.

The government is currently offering solutions unrelated to the causes. It is like applying red medicine to a stomachache. We need to identify where the stomach hurts, but instead, they are cutting out the painful part. A clear example is the ban on weekend operations of supermarkets. Ultimately, consumers became inconvenienced and avoided regulations by shopping before Sunday. The same applies to real estate. Simply telling people not to engage in real estate does not solve the underlying problems. The causes must be precisely identified and addressed, but such considerations are lacking. Even with the concept of land public ownership, everyone wants to enter Gangnam. Supply is limited, so how it is allocated is important. We must find the least bad option first. Issues such as unemployment arising from market prices should be approached by supplementing social safety nets.

- How would you explain this through game theory?

▲ Game theory refers to making decisions by calculating what choices others will make in a given situation. It involves analyzing the game and redesigning it so that people will cooperate by providing incentives. If we think "A is better, but people will choose B," we consider how to attract them to A, restructure the game, and play it again. Then the direction will be correct. This means that to establish proper policies, it is necessary to analyze whether the policy targets have incentives to follow the policies. When policies such as real estate measures or minimum wage increases are introduced, did the public comply? Ultimately, things went differently than initially expected. The same applies to the Lecturer Act. Although the policy was introduced out of sympathy for lecturers’ treatment, in reality, it eliminated lecturer positions in schools. It is the same as the minimum wage issue. The government must analyze how people will respond whenever new policies are introduced.

- Are you saying that policy review is necessary?

▲ Yes. The government has made promises to its supporters, and many aspects involve zero-sum games. If A and B each have apples and pears and share them, both benefit. But if only A has something and B has nothing, it is a zero-sum game. This leads to fierce conflict. The recent controversy over "Tada" is similar. The taxi industry, which had monopoly power, feels it is being unilaterally taken away. We need to find ways for both sides to benefit. When capitalists and workers feel their possessions are being taken, conflicts inevitably intensify.

- It seems that resistance to entering the Fourth Industrial Revolution has intensified due to conflicts between traditional and new industries.

▲ People tend to resist learning new things if they are doing well because production slows during the learning process. When it is unclear who is good or bad, there is no risk in investing. This is common in technological competition. If preparations are not made, things worsen. The government must mediate between existing and new industries. It should encourage movement from one side to the other. It must explain that no matter how strong monopoly rights are, they become worthless if the other side produces something better. There should be concessions and support to facilitate appropriate transitions. Innovation does not stop just because of resistance, so existing industries must make concessions.

Professor Lee In-ho of the Department of Economics at Seoul National University is being interviewed by Asia Economy on December 20. / Photo by Moon Ho-nam munonam@

- President Moon Jae-in evaluates that "our economy is steadily advancing."

▲ The government’s recent statement that "the economy is psychology" and that we should not be scared in advance is somewhat correct. If the economy ran well with just rosy thinking, there would be no need to worry. However, correct judgment about what is wrong is necessary to produce proper policies. Within such policies, it is appropriate to say "there is no need to think pessimistically." For example, in employment statistics, the reduction of jobs for people in their 40s and the poor condition of temporary jobs for those in their 60s clearly indicate a decline in employment quality. The government must clearly explain why these phenomena should be viewed positively. Instead, it seems they only think "why do they keep trying to belittle us?"

Regarding the overall price level of the national economy, if we discuss whether to judge by the GDP deflator or the consumer price index, we can conclude that consumers’ purchasing power is still insufficient, while producers can argue they are being paid according to their performance. If each side only insists on its own argument, there is no solution.

- What is your view on the government’s elderly employment policy?

▲ While jobs for the elderly have increased, jobs for people in their 40s have decreased. The economy is not good, so jobs for people in their 40s have declined. There should be policies for 40s employment, but since there are none, the budget was used to increase jobs for those in their 60s. It is necessary to examine how much these elderly jobs actually contribute to economic stimulus. Even if elderly income transfers increase, the money does not return as consumption. Elderly people tend to hold onto money, fearing it will not be given again tomorrow. Many countries have tried to solve aging by distributing money, but it did not lead to consumption. Since a single mistake can make the rest of their lives difficult, social measures to prepare for old age rather than income compensation are needed. Creating jobs for people in their 40s that actually stimulate the economy is most important.

- What advice would you give to the government and the Blue House?

▲ I want to emphasize policy flexibility. Unlike the 1997 financial crisis when structural problems occurred all at once, continuous structural reforms must take place. Industrial demand is shifting from offline to online. Offline structural reforms are also necessary. Facility investment is important, but people are also important. In Korea, people do not move when told to move from one sector to another. This is rigidity. A win-win system must be created to facilitate easy movement. If difficulties arise during this process, policies should be developed to actively support the transition. Restructuring should be conducted by experts who understand the industry.

- There are many concerns about the decline in potential growth rate.

▲ Until now, it was easy because we copied others. But now we excel in most fields such as semiconductors and nuclear power. Ultimately, the speed of technological advancement in creating new things is important. Aging and population decline also have significant impacts. It is difficult to raise our status, and aging and population decline make it even harder. The increasing rigidity of the labor market is also a major problem. Social conflicts are intensifying, and there is no willingness to move. The environment must allow flexible mobility. Labor market rigidity is the main cause of the decline in potential growth rate.

Professor Inho Lee’s Biography

▲ Graduated from Seoul National University, Department of Economics (1980)

▲ Ph.D. in Economics from UCLA, USA (1992)

▲ Chairman of the Policy Finance Deliberation Committee (2007?2008)

▲ Chairman of the Fair Trade Commission’s Corporate Group Advisory Committee (2009?2011)

▲ President of the Korean Industrial Organization Society (2010?2011)

▲ President of the Korean Financial Information Society (2010?2014)

▲ Chairman of the Financial Development Deliberation Committee (2018?present)

▲ Professor, Department of Economics, Seoul National University (2001?present)

▲ Next President of the Korean Economic Association (February this year)

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