[Opinion] Expectations for the Bank of Korea and Governor Lee Chang-yong

Published 26 Apr.2022 11:47(KST)

Kim Tae-gi, Executive Committee Chair of the Job Solidarity (former Professor of Economics at Dankook University)

Amid signs of stagflation due to soaring prices and declining economic growth, Lee Chang-yong was inaugurated as the Governor of the Bank of Korea. Perhaps due to the consensus that a prolonged vacancy in the governor position would be problematic, he was unusually nominated as a candidate amid bipartisan agreement, and the confirmation hearing was exemplary, focusing on policy. In his inaugural speech, Governor Lee pointed out the challenges facing the Korean economy, such as the retreat of globalization, aging population and low productivity, polarization, and household and government debt, stating that the framework of economic policy must change. He also said that the Bank of Korea’s role in price and financial stability must go beyond the scope of monetary policy, and to this end, he pledged to strengthen communication with overseas and external experts to enhance expertise.

Governor Lee’s vision aligns with the new government’s plan to shift economic policy from government-led to private sector-led. With his inauguration, there is hope that the national capacity to overcome the imminent risk of stagflation will increase. However, while government-led economic policy has become customary, the Bank of Korea has shown little interest in changes in the real economy, which is a key variable in determining interest rates. As a result, when real estate prices began to soar, the Bank had to point out the limitations of policies centered on supply regulations and loan restrictions and raise interest rates, but missed the timing. It has been difficult to hear criticisms that government employment statistics such as unemployment rates are disconnected from the reality of the labor market, and that policies to increase jobs through fiscal expansion reduce the potential for economic growth while worsening government debt and price instability.

The Bank of Korea Act has aspects that hinder the Bank’s active role. Article 1, Paragraph 1 of the Act stipulates that price stability should be pursued through the establishment and execution of efficient monetary and credit policies, and in 2016, Paragraph 2 was added, stating that attention should be paid to financial stability in conducting monetary and credit policies. However, there is no mention of stability in employment or the labor market. This contrasts with the U.S. Federal Reserve (Fed), which regulates and supervises banks for financial stability and monitors changes in unemployment rates when deciding interest rates to ensure employment stability. To shift the economy from government-led to private sector-led, it is desirable for the Bank of Korea to play the role of the economic command center like the U.S. Fed. However, since Korea’s financial and labor market systems differ from those of the U.S. with stronger government control, prior preparation is necessary.

The ability to bridge the gap between ideals and reality is leadership. For the Bank of Korea to serve as the economic command center, it must first accurately grasp the reality of the real economy. Korea’s household debt is the most severe in the world, making it vulnerable to interest rate hikes. Most household debt stems from real estate loans, and although the elderly hold real estate, they are becoming impoverished, so a financial function that converts owned real estate into income is needed. Korea’s labor market has the lowest birth rate in the world, a rapid decline in the working-age population, and the highest tendency for union strikes globally. External price shocks exert strong pressure leading to wage increases, making the possibility of prolonged inflation high. Moreover, employment is rigid in terms of wages and working hours and heavily dependent on public jobs and fiscal support, increasing the risk of economic recession accordingly.

Improving the quality of economic policy is a pressing task for Korea. Policies have become less predictable and more chaotic as they ignore markets and policy consumers and become subordinated to politics. The Bank of Korea’s role is expected to resolve these issues. The Bank should leverage its advantage as an institution independent from the government and political circles and actively cooperate with relevant ministries. Through this, it should contribute to the scientification of policy by developing statistics and indicators suited to reality and enhancing analytical capabilities, leading the transition to a private sector-led economy and resolving the risk of stagflation. We look forward to the leadership of the Bank of Korea and Governor Lee.

Kim Tae-gi (Executive Director of the Job Solidarity, former Professor of Economics at Dankook University)