[The Editors' Verdict] Economic Policies Revisited Through COVID-19

The novel coronavirus infection (COVID-19) is sweeping across the globe. Originating in China, COVID-19 has spread with a time lag across Asia and Europe, then to the Americas, Oceania, and Africa. Previous epidemics such as Severe Acute Respiratory Syndrome (SARS), Middle East Respiratory Syndrome (MERS), and novel influenza were not as contagious as COVID-19. This strong contagion has paralyzed production and exports in China, subsequently impacting financial markets.

When a social disaster like COVID-19 occurs, the best economic policy is to end the disaster quickly and accurately. In the past, when various crises arose, governments responded with fiscal policy, monetary policy, or a combination of policies. However, this disaster originated in the real economy rather than the financial market and is currently in the stage of transmission to finance, so the policies implemented so far are ineffective in such a disaster.

In previous cases like SARS and MERS, there was an overshooting of consumption and investment at the stage when the epidemic was nearly over. Since economic agents were unable to engage in economic activities or were gripped by anxiety, consumption and investment increased as economic activities returned to normal levels during the final phase of the epidemic.

Therefore, there is no need for domestic participation in interest rate cuts like the recent big cut in the United States. The U.S. had already entered a recession phase from a boom phase as indicated by the inversion of long- and short-term interest rates in August last year, and COVID-19 can be seen as having influenced this. Also, it is difficult to say that negative interest rate policies in Japan or Europe have increased investment. Below a certain interest rate level, lowering rates does not increase consumption and investment.

Thus, last month’s interest rate freeze by the Bank of Korea cannot be seen as a mistake. Rather, if interest rates fall domestically, it is more likely to accelerate household debt growth or asset concentration in real estate rather than increase consumption or investment. Considering the current annual GDP gap and inflation gap, the Bank of Korea’s room for rate cuts is limited. When COVID-19 subsides and the overshooting phase ends, with consumption, exports, and investment returning to average levels, it will not be easy to raise interest rates in the short term.

Although there was despair during the International Monetary Fund (IMF) foreign exchange crisis and financial crisis, many lessons were learned. After the foreign exchange crisis, risk management systems were introduced, and through the financial crisis, understanding of financial products and consumer protection improved. This time, it is necessary to enhance understanding of industries and implement changes in some sectors. This includes assessing competitiveness, technological capabilities, availability and shortage of skilled personnel, and the status of new industries in manufacturing and service sectors by sub-industry.

For example, in some products like masks, consumer prices have risen much more than production costs. This indicates problems in the distribution stage. Correcting such sectors is the government’s role. Accurately distinguishing when economic policy should be left to the private sector and when government intervention is necessary is also a very important economic policy.

In disaster situations, it is as important for the government to focus budget and personnel on health, quarantine, medical care, and medical devices to quickly resolve the situation as it is to pay attention to socially vulnerable groups. Socially vulnerable groups have very limited capacity to cope during disasters. Failing to provide these individuals with essential goods on time is a failure of government responsibility.

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