[The Editors' Verdict] Our Economy Needs Long-Term Management

The renowned British economic weekly The Economist published a special article last month (December 7?13 issue) on the Four Asian Tigers (Korea, Taiwan, Hong Kong, and Singapore). The conclusion of the article was that it is time for them to reinvent themselves. It also expressed concern about a Japanese-style long-term recession.

According to The Economist, Japan's per capita GDP based on purchasing power parity was 85% of the United States' in 1990. Currently, it is only 70%. Structural factors, including population aging and labor market rigidity, have greatly influenced the decline of Japan's economic power. The four emerging industrialized countries of East Asia currently face structural problems, including population aging, that are not much different from those Japan faced 30 years ago. In fact, since the so-called "lost 20 years," Japan has steadily improved structural rigidity. Including labor market flexibility, we have now reached a point where we cannot say we are better off than Japan.

On the 19th of last month, the government announced this year's economic policy direction. However, reading the government's economic policy direction against the background of The Economist's analysis raises doubts about whether the government correctly recognizes the problems of our economy. There is little intention to improve the economic structure. Yet, it forecasts economic growth rates of 2.0% this year and 2.4% next year. Forecasts are just forecasts and do not necessarily have to be accurate. However, if the forecast errors are always in the same direction, one must reflect on oneself. Has the government, after several downward revisions of its forecasts last year, ever reviewed why they were still inaccurate even once?

The core of this year's government policy is to significantly expand fiscal spending to boost growth. Of course, that is still a policy. Fiscal expansion or monetary policies such as lowering target interest rates, so-called aggregate demand management policies, are policies to manage short-term demand. Perhaps the government believes that by easing fiscal spending gently to manage aggregate demand and get through this year, economic vitality will recover next year and the high growth rates of the past will return. Since those who base their policies on the slogan "income-led growth," it is somewhat understandable.

In short, if one thinks that the current difficulties of our economy are only due to short-term economic fluctuations, the situation assessment is mistaken. Rather, it is necessary to recognize that there is a bigger problem in the long-term trend. Anyone can see that when plotting GDP growth rates over time, the long-term (trend) decline has reached a worrying level. Of course, short-term economic downturns caused by policy failures such as the sharp increase in the minimum wage are also concerning, but those can be recovered from in some way. However, the decline in long-term growth potential is either permanently irrecoverable or requires enormous pain to recover.

Nevertheless, under the Moon Jae-in administration, economic policies chasing daydreams have been repeated. Judging from the policy direction, significant changes this year seem unlikely. The government plans to repair sidewalks and increase short-term elderly jobs to raise employment rates, which is astonishing if they believe such policies can overcome our economic difficulties. What our economy needs most now is long-term management?to prevent the trend decline. Low growth means many quality jobs are not created, household debt accumulates, and consumption and investment remain sluggish. To exaggerate, almost all problems of our economy arise from low growth. Even income distribution cannot be improved with low growth. How can redistribution occur when there are not many earners?

Jo Jang-ok, Professor of Economics, Sogang University.

This content was produced with the assistance of AI translation services.