Six Economic Leaders and Scholars Warn: "The Current Crisis Is a Complication... Ignoring It Could Be Fatal"

Government and Political Circles Must Actively Seek Ways to Enhance Competitiveness
Interest Rate Hikes Inevitable... Policy Coordination Crucial

[Asia Economy Reporter Seo So-jung, Sejong = Reporter Kwon Hae-young] "Internal and external balances are conflicting and collapsing. We must be vigilant because the entire world could experience a simultaneous economic recession."

This is the diagnosis of the current state of the Korean economy by former economic leaders and economists. They characterize the current situation as a complex crisis where both finance and real economy are struggling simultaneously due to high inflation, high exchange rates, and high interest rates, emphasizing that the Yoon Seok-yeol administration’s economic team must heighten its sense of crisis more than ever. In particular, unlike the 2008 financial crisis when the world cooperated under a shared understanding of a global financial crisis, the current difficulties are compounded by overseas factors such as the geopolitical issue of the Ukraine war, COVID-19, and US-China conflicts, as well as non-economic factors. Therefore, they advise that the government and political circles actively seek ways to strengthen the competitiveness of economic agents. The common solution proposed by former economic leaders and economists includes not only tax cuts on corporate and income taxes but also structural reforms over the long term.

Asia Economy interviewed six former economic leaders and economists?including former Ministers of Strategy and Finance Yoon Jeung-hyun, Park Jae-wan, Yoo Il-ho; former Bank of Korea Governor Park Seung; Seoul National University Economics Department Special Professor Lee Pil-sang; and incoming Korean Economic Association President Hwang Yoon-jae?to explore the current situation of the Korean economy and ways to leap forward.

◆ Stabilizing Exchange Rates and Inflation as the Top Priority = Former economic leaders unanimously agreed that stabilizing prices and the foreign exchange market is the current government’s top priority. Former Minister of Strategy and Finance Yoon Jeung-hyun advised, "In a country like ours that depends heavily on exports and has a high external dependence, when external balance?meaning trade balance, current account, exchange rate, exports?and internal balance?meaning domestic demand, investment, growth?conflict, external balance must take precedence. There is an inevitability to raising interest rates to manage the exchange rate."

Former Deputy Prime Minister and Minister of Strategy and Finance Yoo Il-ho also pointed out, "With the US rapidly raising benchmark interest rates to curb inflation, we have no choice but to follow due to the interest rate differential between Korea and the US. This causes problems with the exchange rate and investment, and the stock market takes a direct hit."

Former Minister Park Jae-wan similarly said, "Inflation, exchange rates, and recession are all urgent issues, but the immediate priority is to resolve the pressing problems of inflation and exchange rates."

They noted that unlike past crises, it is difficult to find a clear-cut solution now, making the government’s policy mix more important than ever. Former Minister Yoon said, "Prices, current account/international balance, and growth form a devilish triangle. Growth tends to raise prices and worsen the international balance, so managing the international balance and prices properly can hinder growth, creating a trade-off." From the government’s perspective, measures such as tax cuts to prevent recession for growth and employment are unavoidable, while the Bank of Korea must raise interest rates due to excessive liquidity in the market, which can conflict. However, through maximum cooperation between ministries and institutions, it is necessary to suppress inflation while preventing recession. Former Governor Park Seung diagnosed, "The Korean economy is now at a turning point where it structurally must enter low growth," calling for an active and bold role from the central bank.

Meanwhile, Special Professor Lee Pil-sang of Seoul National University cited the collapse of the real estate market as a trigger. Unlike past crises, with household, corporate, and government debt having surged, if real estate collapses due to successive interest rate hikes, the economy could fall into chaos and instability. Professor Lee warned, "If the 1997 foreign exchange crisis and the 2008 crisis were like strokes in human illness, the current economic crisis is a kind of complication. The economy won’t collapse immediately like during the foreign exchange crisis, but if the surging debt is not treated (addressed) in time, the economy could collapse."

◆ Corporate Tax Cuts Could Relieve Businesses = Former economic leaders and scholars urged the government to actively seek ways to enhance corporate competitiveness as the Korean economy stands at a crossroads of low growth. In particular, they viewed corporate tax cuts as one possible way to ease the burden on companies.

Former Minister Yoon Jeung-hyun said, "Corporate tax cuts should not be dismissed as tax cuts for the rich. When a corporation makes a profit, that profit does not go only to the corporation but also to shareholders, creditors, and employees who make up the corporation."

Former Deputy Prime Minister Yoo Il-ho said, "There is no perfect remedy to ease the economic slowdown, but to reduce the shock even slightly, the government must strengthen corporate competitiveness. Cutting corporate taxes and significantly easing regulations will make it easier for companies to operate, which alone will stimulate investment and serve as a measure to boost the economy." He emphasized the need to support export companies and comprehensively reduce regulations and corporate taxes to minimize difficulties for businesses.

Incoming Korean Economic Association President Hwang Yoon-jae said, "Corporate tax cuts are one option. However, if corporate tax reductions are expanded too much, it relates to fiscal deficits, and as seen in the UK’s tax cut policies, there can be severe aftershocks, so caution is needed." He stressed, "The government’s role also includes removing unnecessary regulations so that startup companies can easily enter the ecosystem and creating a system that allows companies to recover even if they fail in their business activities."

Former Minister Park Jae-wan suggested, "More importantly, we need to consider what to do after the crisis ends. It is necessary to undertake fundamental structural reforms with a long-term perspective." He explained that trimming excess in labor, education, pensions, and public institutions including the government is inevitable in the long run. Park emphasized, "We must foster entrepreneurial spirit so that factories do not move overseas and jobs are created domestically. Fundamentally, we need to consider ways to raise the country’s potential growth rate."

There was also a view that while the government must naturally have a sense of crisis, it should not excessively induce panic among the public. Incoming President Hwang said, "If concerns about recession grow due to successive interest rate hikes, actual consumption and demand will decrease, potentially fulfilling a self-fulfilling prophecy. Because the economy can worsen depending on psychological states, it is important to implement policies so that the public can trust and have confidence in the government."

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