[In-depth Interview] "Economic Team's Lack of Crisis Awareness... Political Sphere's Vitocracy Problem"

'No Significant Progress in Private-Led Dynamic Economy'
Need to Target Niche Markets Amid US-China Conflict

Professor Ilpsang Lee, Special Appointment, Seoul National University. / Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Seo So-jeong] "The Yoon Suk-yeol administration lacks a sense of economic crisis and its responses are reactive rather than proactive. Even a small pebble causes waves to ripple. The political sphere’s unconditional rejection and vetocracy (extreme factional politics) are also problematic."

Lee Pil-sang, a special professor at Seoul National University’s Department of Economics and former president of Korea University, who has observed the Korean economy as a scholar for a long time, evaluated the six-month-old Yoon administration and the political sphere this way. The adverse factors that have weighed down the Yoon government’s economic team are still ongoing. Consumer prices, which troubled the administration from the beginning, have rebounded again after three months, and exports, the backbone of the Korean economy amid intensified US-China conflicts, are showing unstable signs. Furthermore, the Legoland-related incident has sharply contracted the corporate bond market, deepening the liquidity freeze. Professor Lee emphasized, "Now is not the time for unnecessary political strife," adding, "Just as good blood circulation is essential for human health, urgent reforms in regulation, labor, finance, and policy are needed to ensure the market economy flows smoothly." Asia Economy met with Professor Lee to diagnose the current economic crisis and government policies and to seek solutions for the Korean economy to overcome the crisis.

Q. The Yoon administration’s economic team has reached six months since its launch. How would you evaluate it?

A. The government set the goal of "creating a dynamic economy led by the private sector," but there has been no significant progress. There is a lack of awareness of the economic crisis, and the response has been complacent. To prevent a crisis, preemptive countermeasures must be presented, but not only are the measures insufficient, they are reactive. In a challenging global and domestic environment, it is important for the government not only to accurately diagnose the crisis and prescribe solutions but also to take preemptive actions to prevent it. The Legoland incident revealed the internal vulnerability of our economy. Even a small pebble causes waves. Since the Yoon administration began, emergency economic ministerial meetings and emergency macroeconomic financial meetings have been held frequently, turning "emergency" meetings into "standing" meetings, but the results have been limited. The liquidity crunch triggered by Legoland was addressed belatedly by the government through large-scale liquidity injections, calming the situation, but structurally, this is not an isolated incident. The government must learn from this incident, diagnose problems in advance, and timely implement effective countermeasures to resolve the crisis.

Q. As US-China conflicts intensify, Korea’s difficulties are increasing. What strategies are needed?

A. Although the Democratic Party performed unexpectedly well in the US midterm elections, the "America First" policy prioritizing domestic industry protection and US-China conflicts are expected to continue. Korea, caught in a dilemma, needs three strategies. First, strengthen economic diplomacy. China is Korea’s largest export market, but Korea is also China’s largest import market. The two economies have a symbiotic relationship, so Korea can argue why it should be a scapegoat in US-China conflicts. Emphasizing that retaliation or disadvantages would boomerang, Korea should maintain close relations. Second, target niche markets. As the US excludes Chinese goods and China excludes American goods, niche markets emerge on both sides; Korea can seize opportunities by filling these gaps. Third, secure technological leadership. Korea must lead in advanced technologies such as semiconductors, drones, aviation technology, and artificial intelligence (AI) to secure technological sovereignty. Leading in advanced technology will provide advantages not only economically but also in security. Instead of pressure or retaliation, Korea should aim to be in a position where it is requested for support by securing technological leadership.

Professor Il-sang Lee, Special Appointment, Seoul National University. / Photo by Hyunmin Kim kimhyun81@

Q. The current government is pushing for corporate tax cuts, but opposition parties strongly oppose it.

A. The political sphere’s "vetocracy," where policies and claims from the opposing side are rejected outright, is problematic. The global economy is essentially in a state of war. In this economic war era, companies protect and develop the economy, but if Korea’s tax burden is higher than other countries, it will be at a disadvantage in the war. Korea’s highest corporate tax rate is 25.0%, higher than the OECD average of 21.2%. Foreign companies avoid investing domestically, and domestic companies move overseas. The opposition calls it a "tax cut for the rich" and opposes it, but Korea’s economy is driven by large corporations. The top 1% of companies pay over 80% of total corporate taxes. This is the economic structure, and it is unreasonable to think it benefits specific companies. Issues with large corporations should be addressed through fair trade policies rather than tax policies. From the perspective of strengthening weapons in the economic war era, corporate tax cuts are necessary. Reviving the economy should not be divided by ruling or opposition parties. Unnecessary political strife must stop.

Q. The US’s tightening monetary policy continues. The Bank of Korea faces difficulties in monetary policy operation amid the crossroads of inflation and growth.

A. If the economy enters stagflation (economic stagnation with high inflation), monetary policy may become ineffective. To escape the stagflation trap, supply-side policies are needed. Industrial development and economic growth through revitalizing corporate investment and job creation can resolve the recession. Finance is the foundation of industrial development. During the COVID-19 pandemic, liquidity flooded the market, but money flowed into real estate and securities rather than industrial development or corporate investment. As a result, the economy became overheated with bubbles, and its fundamentals worsened. Just as good blood circulation is essential for health, if blood pools in one place, it can clot and burst. This is why the flow of money is important in a market economy. Finance must support the flow of money into corporate investment and industrial development. Although concerns about capital outflow due to interest rate differentials between Korea and the US are growing, more important is whether Korea’s economic growth engine is alive. Developing and revitalizing industries to attract foreign investment is ultimately more important.

Interview_Professor Il-sang Lee, Special Appointment, Seoul National University./Photo by Hyunmin Kim kimhyun81@

Q. Trade deficits have accumulated for eight consecutive months, and the annual trade balance is expected to turn negative for the first time in 14 years this year.

A. Just before the 1997 Asian financial crisis, Korea’s trade deficit was $20.6 billion, and during the 2008 financial crisis, it was $13.3 billion. This year, as of the 10th of this month, the accumulated trade deficit is $37.6 billion, far exceeding the record $20.624 billion in 1996. Korea’s economy depends on exports, but its growth engine is stalling. Strengthening fiscal soundness is also a challenge. The new government’s first budget is 639 trillion won, 5.2% more than this year’s original budget. Although the government calls it austerity, if an emergency arises and supplementary budgets are introduced, it will become an expansionary budget. Upon close examination, there are many populist expenditures such as election pledges. Given the current economic situation, spending should be further reduced.

Q. There are growing concerns that the rapid increase in household debt could become a trigger for a crisis.

A. According to OECD analysis, as of last year, Korea’s household debt to disposable income ratio was 206.6%, the fifth highest among 26 major countries. Household debt stands at 1,869 trillion won, corporate debt at 2,476 trillion won. Government debt also reaches 1,075 trillion won, exceeding 50% of GDP. More than the scale, the rapid growth rate is a bigger problem. As the real estate bubble bursts, household debt could become a trigger for a chain of bankruptcies.

Q. What is the most urgent task for Korea’s economy to reach a turning point?

A. Bold structural reforms to clear out insolvent industries and bankrupt companies are urgent. Reforms in regulation, labor, finance, and policy must also be implemented. Transitioning to a negative regulation system to eliminate unnecessary regulations and resolving the severe rigidity in the labor market are necessary. Finance is also a target for reform. Currently, finance is focused on "money-making" rather than developing the economy. Additionally, industrial policy is insufficient; government policy reforms on how to develop the Fourth Industrial Revolution and future industries are urgently needed.

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