"Fiscal Investment Efficiency and Private Investment Vital for Success of Korean New Deal"

[Asia Economy Reporter Ki-min Lee] To overcome the novel coronavirus infection (COVID-19) and achieve an economic transformation, the government’s 'Korean New Deal' must secure the economic feasibility of fiscal investment and enhance the vitality of private investment, according to claims.

The Korea Economic Research Institute (KERI) released a report titled 'Industrial Policy Without Growth and Future Improvement Measures' on the 12th, pointing out that 'economic feasibility' should be emphasized in the preliminary feasibility evaluation of fiscal investment.

Before making proposals for the Korean New Deal, KERI evaluated that the performance of the Moon Jae-in administration’s representative growth strategy, 'Innovative Growth,' over the two years from 2018 to last year was very poor.

First, considering that the investment growth rate is a variable with a significant base effect, it is very unusual to have negative growth for two consecutive years. The real equipment investment growth rates were -2.3% in 2018 and -7.5% last year, recording negative growth. From 1960 to 2017, equipment investment experienced two consecutive years of negative growth only twice: during the IMF financial crisis in 1997-1998 and the global financial crisis in 2008-2009.

Additionally, according to KERI’s analysis, only 10 out of more than 140 countries worldwide recorded negative investment growth rates for two consecutive years, and among the 37 member countries of the Organisation for Economic Co-operation and Development (OECD), only three countries including Korea, Iceland, and Turkey showed this trend. In particular, the equipment investment in industries closely related to innovative growth, such as ▲manufacturing of computers, electronic and optical equipment, decreased by 10.2% and 20.0% in 2018 and last year respectively, significantly below the overall average.

Indicators of corporate capital productivity and key indicators related to corporate management were also found to be deteriorating. The corporate capital productivity indicators ▲total capital investment efficiency fell from 18.8% in 2017 to 16.9% last year, ▲equipment investment efficiency dropped from 61.0% in 2017 to 54.8% last year, and ▲machine investment efficiency declined from 269.8% in 2017 to 249.0% last year. Corporate performance indicators such as ▲sales growth rate, ▲operating profit margin on sales, and ▲debt ratio also worsened compared to 2017.

KERI argued that the discord among the government’s core economic policies, including innovative growth and income-led growth, led to poor economic performance. The policy directions such as rapid wage increases and governance regulations are hindering innovative growth, which is based on productivity improvement through innovation and an economic system where creativity is exercised. Researcher Tae-gyu Lee of KERI stated, "When core economic policies have different objectives, not only the effectiveness of the policies but also the market’s trust in the policies diminishes. Without trust in policies, the market becomes reluctant to invest in the future, resulting in the sharp decline in investment over the past two years."

KERI claimed that for fiscal investment in the Korean New Deal to serve as a catalyst for private investment, it is necessary to present multiple economic policies with the same direction to gain market trust. Researcher Lee emphasized regarding the recently promoted Fair Economy Three Laws by the government, "They cause enormous costs to maintain governance and hinder investment in innovation," adding, "Strengthening corporate regulations is not a policy direction that can gain market trust." He also pointed out the need to more strongly promote regulatory reforms such as the introduction of a regulatory impact assessment system for legislative proposals, the introduction of regulatory cost reduction targets, and labor reforms.

The report particularly forecasted that since the Korean New Deal involves investments exceeding 67 trillion won, securing the economic performance of fiscal investment will determine the overall success of the New Deal policy. It emphasized that the ultimate goal of this policy, the transformation of the economic paradigm, cannot be achieved without economic performance backing it, highlighting the importance of securing the economic feasibility of fiscal investment.

Furthermore, to ensure the efficiency of fiscal investment, it was pointed out that the economic feasibility evaluation in the ongoing preliminary feasibility study system should be improved to emphasize economic feasibility more. Researcher Lee stated, "With the reform of the preliminary feasibility study system, the weight of economic feasibility among evaluation factors is decreasing," and argued, "To secure the economic performance of the New Deal policy, which is based on fiscal investment, the preliminary feasibility study system should be operated in a way that emphasizes economic feasibility more."

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