Hankyung Research Institute: "Must Escape Fiscal Absolutism to Prepare for Post-Corona Era"

"Restructuring the Global Value Chain (GVC) in Line with the Trend of Decoupling from China"

[Asia Economy Reporter Ki-min Lee] To prepare for the post-COVID era, it has been pointed out that the government should move away from government-led fiscal omnipotence and restructure the global value chain (GVC) in line with the trend of companies moving away from China.

The Korea Economic Research Institute (KERI) held a seminar titled "Post-COVID, Prospects for Changes in Economy and Society" on the 15th at the Federation of Korean Industries Conference Center. In his opening remarks, KERI President Tae-shin Kwon stated, “De-globalization will pose significant risks to the Korean economy, and if government influence increases, the growth potential will inevitably be damaged due to the absence of a creative market economy,” adding, “We must reduce dependence on China while solidifying the foundation of a free market economy based on ‘small government, big market.’”

First presenter Kyung-yeop Cho, head of KERI’s Economic Research Office, pointed out that since 2017, the growth rate of fiscal expenditure and economic growth rate have shown a de-synchronization phenomenon, leading to a collapse of fiscal soundness. Cho explained, “Due to fiscal omnipotence trying to solve policy side effects with fiscal spending, national debt has increased by 104.6 trillion won over the past three years, and this year it is expected to increase by 111 trillion won.”

According to KERI, the growth rate of fiscal expenditure has increased faster than the economic growth rate, widening the gap to 10.6 times last year. Especially this year, with three supplementary budgets, fiscal expenditure increased by 15.1% compared to the previous year, but the growth rate is likely to record a negative figure, so the gap is expected to widen further. Moreover, since last year, tax revenue deficits have begun to occur, and Cho predicted that this year will see the largest-ever tax revenue deficit exceeding 16.1 trillion won. As a result, this year’s national debt to GDP ratio is expected to exceed 45%, and the managed fiscal balance deficit excluding the four major social security funds such as the National Pension Fund and Private School Pension Fund is expected to greatly exceed 6%.

Cho said, “There is growing concern that fiscal omnipotence is widespread and even the National Assembly’s role as the ‘guardian of the nation’s finances’ has disappeared, leading us to follow in the footsteps of countries that have experienced national bankruptcy,” adding, “Applying the IMF’s Government Finance Statistics (GFS) 2014 standard, Korea’s national debt in 2018 reached 106.5% of GDP, so the government’s logic that increasing national debt is acceptable because it is lower than the OECD average is difficult to justify.” He also added, “The Korean version of the New Deal policy, which lacks novelty, and projects that cannot even pass preliminary feasibility studies, are nothing more than transferring resources from productive sectors to unproductive ones, increasing national debt and having adverse effects on long-term growth.”

Cho also criticized the government’s policy to expand public servant recruitment, saying it would rather increase the unemployment rate. He said, “The government has invested a total of 126.8 trillion won in job-related projects over the past four years, including the main budget of 85.3 trillion won and supplementary budgets of 41.5 trillion won, aiming to create 810,000 public jobs, but this has resulted in a devastating employment crisis and distribution disaster.” The analysis suggests that increasing the number of public servants will raise the unemployment rate by reducing jobs in the private sector and increasing job seekers, rather than lowering unemployment through more public servant jobs. He said, “Empirical analysis estimating the impact of increasing the number of public servants on the unemployment rate showed that a 1% increase in public servants results in about a 2.1% increase in the unemployment rate.”

The second presenter, Research Fellow Tae-gyu Lee of KERI, pointed out the urgent need to restructure the GVC to create conditions to attract domestic companies exiting China. He said, “As the US-China conflict has clearly become a global hegemony competition beyond a simple trade dispute, participation in de-Chinaization by major advanced countries has increased, and the COVID-19 pandemic is expected to accelerate de-Chinaization.”

Lee analyzed that China’s GVC has been weakening for several years due to rising labor costs and a hostile business environment, and due to the US-China hegemony competition, the GVC is expected to be restructured in a way that lowers dependence on China, returns to home countries, or regionalizes.

He also emphasized, “If anti-business and pro-labor union policies, Galapagos-like regulations, and corporate tax increases continue, attracting companies escaping from China will be impossible, and it will become an obstacle for companies trying to adapt to the changing environment through 4th Industrial Revolution technologies.” He added a warning, “In an international political and economic environment that forces de-globalization, if domestic companies’ production costs and regulatory environments are not drastically improved, de-globalization will pose significant risks to the Korean economy.”

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