Hankyung Research Institute "COVID-19 Crisis Requires Phased Response Including Corporate Investment and SOC Expansion"

Presentation of 5 Core Tasks for Overcoming Crisis
Strengthening Private Investment through Regulatory Reform and Tax Improvement

[Asia Economy Reporter Dongwoo Lee] There has been a claim that active economic stimulus measures and structural improvement of the Korean economy are necessary to overcome the economic crisis caused by the spread of the novel coronavirus infection (COVID-19). It is explained that after gradually implementing economic revitalization policies, strong reforms in the private and public sectors are needed.

On the 22nd, the Korea Economic Research Institute (KERI) presented five key tasks to overcome the crisis through its "Comparison and Analysis of the 2008 Global Financial Crisis and the 2020 COVID-19 Economic Crisis": ▲ Activation of corporate investment through regulatory reform and tax improvement ▲ Expansion of SOC investment ▲ Proactive and autonomous restructuring ▲ Public sector reform ▲ Improvement of the welfare system and securing fiscal soundness.

KERI explained that during the early stages of the financial crisis, efforts focused on supplying liquidity to financial markets and supporting vulnerable industries and affected companies to contain the crisis, followed by activation of private investment through regulatory reform and tax improvements. As a result of sequentially promoting economic structural improvements such as reforms in the private and public sectors, Korea was able to overcome the crisis faster than other countries, according to KERI.

Choo Kwang-ho, Director of Economic Policy at KERI, emphasized, "As the crisis progresses, additional active economic stimulus measures will emerge to prevent the shock from spreading throughout the economy. Taking the crisis as an opportunity, serious consideration by authorities on structural improvements of the economy, including reforms in the private and public sectors, is necessary for the Korean economy to take a leap forward."

KERI advocated regulatory reform and tax support to activate corporate investment as the first task to overcome the COVID-19 economic crisis. It pointed out that the outflow of investment overseas is severe, making urgent countermeasures necessary. It noted that last year, domestic companies' overseas investments were 4.8 times greater than foreign companies' investments in Korea.

As a countermeasure, it argued that a control tower for regulatory reform to attract corporate investment should identify key tasks and apply temporary regulatory exemptions. During the past financial crisis, the Prime Minister's Office identified 280 regulatory reform tasks to overcome the economic crisis and implemented temporary regulatory exemptions. Temporary regulatory exemptions included special approval for extended work hours beyond the 52-hour workweek, mandatory closure of large marts, and bans on online sales.

It also stressed the need to improve corporate investment sentiment through reductions in corporate and income taxes and investment-related tax incentives. KERI added that over the past 10 years, major advanced countries (G7) have lowered their highest corporate tax rates by an average of 5.4 percentage points to attract corporate investment. During the financial crisis, the government reduced corporate and income taxes and provided tax benefits for corporate investments such as research and development (R&D).

KERI mentioned the expansion of SOC investment as the government's second key task. The construction sector has high production and employment inducement effects, and whenever economic and employment crises occurred in the past, the government overcame the crisis through large-scale construction investments. Therefore, it is possible to consider early ordering and rapid execution of the 24 trillion won national balanced development project already announced by the government by simplifying related procedures. During the financial crisis, the government increased the SOC budget by nearly 13 trillion won and announced a large-scale SOC investment plan worth 100 trillion won, driving economic growth.

Furthermore, KERI emphasized that for the Korean economy to grow to the next level after the end of COVID-19, private sector restructuring, public sector reform, and securing fiscal soundness are important. As COVID-19 prolongs, companies are exposed to crises, raising the need for restructuring. KERI argued that to promote voluntary business restructuring and reorganization by companies, the scope of the Corporate Vitality Act should be expanded to cover all industries and all companies.

KERI cited that during the past financial crisis, the government held seven emergency economic policy meetings related to restructuring. As a result, it swiftly proceeded with restructuring of insolvent industries and induced continuous restructuring of potentially insolvent companies centered on creditor financial institutions.

Public sector reform is also necessary. KERI cited the example of the French Macron government, which raised economic growth rates through reforms of public sectors such as the state-owned railway company, and proposed integration of public institutions with overlapping functions and roles, along with improvements in wage systems and employment practices of public institutions. During the past financial crisis, the government also implemented hardware reforms such as privatization and consolidation under the public institution modernization plan, as well as software reforms including labor-management relations modernization and wage system restructuring.

Finally, KERI emphasized the importance of securing fiscal soundness. Due to factors such as low birth rates and aging population, social welfare budgets have increased, significantly worsening fiscal soundness. KERI pointed out the urgent need to improve the efficiency of the welfare delivery system by examining overlaps between welfare budgets across ministries and elements of waste in manpower or costs.

During the past financial crisis, the government integrated and reorganized welfare projects with similar characteristics or overlapping targets (from 249 to 159 projects) and established an integrated welfare service management system (Social Welfare Integrated Management Network) to prevent fraudulent or duplicate welfare service claims.

Choo Kwang-ho, Director of Economic Policy at KERI, said, "After first implementing economic revitalization policies as emergency treatment for COVID-19, strong reforms in the private and public sectors are necessary to transform the economy into one resilient to crises."

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