The pragmatism of Lee MB's economic policies

[레밍턴스틸(요다)]

The pragmatism of Lee MB's economic policies 
 
 
 
 
This is the first of a two-part interview with University of Cambridge Professor Chang Ha-joon. - Ed.

The most widely used word throughout President-elect Lee Myung-bak's campaign and the transition committee phase has been "pragmatism." He has billed himself as a practical problem solver who stands above the ideological fray to fix whatever ails the country. Especially in matters of the economy, by far the most important campaign issue in voters' minds during the presidential election, Lee has set forth with numerous policy initiatives that aim to boost the nation's fortunes, and at the same time bring South Korea into the exclusive club of developed-nation status within 10 years.

But the definition of what it means to be pragmatic can be subjective. For example, the famous campaign pledge of "747" - 7 percent annual gross domestic prodect growth, $40,000 per capita income, and becoming the 7th largest economy in the world - may not be considered pragmatic to some economists.

One of those skeptics is renowned economist Professor Chang Ha-joon of the University of Cambridge. The highly acclaimed academic specializes in developmental economics and, of course, has a strong scholarly interest in his native South Korea. With Seoul set to undergo drastic changes in its economic policies, the Cambridge professor urges the nation not to blindly accept everything at face value, but to examine the implications of those policy initiatives measurably. In an email interview with The Korea Herald, Chang offered his insights and recommendations regarding the president-elect's economic plans.

KH: One of the keywords of Lee Myung-bak's philosophical approach has been "pragmatism." You've gone on record questioning the very concept of what it means to be economically pragmatic. What is a pragmatic economic policy?

Chang: Being pragmatic means having no fixed ideas about the means with which one achieves one's goals and chooses the most effective means according to the circumstances. The idea is perfectly summed up in former Chinese leader Deng Xiaoping's saying, "it does not matter whether the cat is white or black as long as it catches mice."

MB's people talk of pragmatism and attack the previous government for being driven by ideology, but they also seem to have some fixed ideas about how best to improve the national economy, which I presume is their goal. Privatization and financial deregulation are the most prominent examples.

Another thing I want to emphasize is that pragmatism works only when the goals are clear. Unless you know your goals for sure, you cannot know what means are the best. In this sense, the MB government needs to have a more open and thorough debate on what our national goals should be.

KH: Speaking of pragmatic promises, a very flashy campaign slogan was the "747" pledge. Already we have reports that one of those "Sevens" will not be delivered, as Lee has scaled back this year's projected GDP growth to 6 percent. You felt all along that 7 percent growth was an unrealistic expectation.

Chang: Before the 1997 financial crisis, 7 percent growth was usual. So from that point of view, there is no reason why Korea shouldn't be able to achieve that.

However, during the last 10 years, following the changes in economic policies and institutions after the 1997 financial crisis, the Korean economy has lost much of its dynamism. Due to the increasing power of the stock market and the growing conservatism of the banks (they used to lend 90 percent of their money to business firms until the early 1990s; now the ratio is around 40 percent, as they concentrate on "safer" mortgage lending), business firms have not invested as aggressively as before. Due to increased job insecurity and the lack of a decent welfare state, people have become much more conservative in their career choices, shunning professions like science and engineering, thus depriving the country's innovation machinery of much-needed fresh talent. All these have conspired to reduce the dynamism of the economy.

Given these conditions, deregulation and expansionary macroeconomic policies alone cannot suddenly raise the growth rate to 7 percent, especially in a world economy that is due to slow down significantly.

KH: Although you have expressed skepticism toward some of Lee's economic policies, you also have stated that President Roh's Participatory Government failed during its economic stewardship.

Chang: The Roh government persisted with neo-liberal policies that sapped the Korean economy of its dynamism, which I discussed above. It made a headlong dash into an FTA with the United States without adequate preparation or consensus building. The authoritarian way in which it dealt with the opposition to the FTA more than offsets the "anti-authoritarian" credentials it acquired during its early years. It also wasted national energy pursuing an unrealistic plan to transform Korea into an East Asian "financial hub," while doing little to strengthen our traditional advantages in manufacturing.

To its credit, it did pay some attention to improving the welfare system, but the achievement was meager (raising welfare spending from around 5.5 percent of GDP to just over 7 percent) and far too inadequate to deal with the rising inequality and poverty problems that its neo-liberal policies have produced.

KH: That being said, one of the few areas where Roh and Lee are in agreement is on the issue of foreign trade. Specifically with the Free Trade Agreement with the United State, there seems to be broad bilateral consensus that the FTA is vital for South Korea's future economic survival. You do not agree with that assessment.

Chang: One thing that needs to be pointed out is that the so-called free-trade agreements are not really free-trade agreements. Having free trade with the United States means discriminating against other trading partners. Of course, you can get around this problem by signing FTAs with all your trading partners, but that will incur huge negotiating costs. This is why we have multilateral trading arrangements, such as the World Trade Organization. And this is why I am a firm supporter of multilateralism, despite my misgivings about the way in which the WTO is run.

Bilateral free trade agreements are likely to be good for both countries if it is done among countries at similar levels of development, as it enlarges markets and gives competitive stimuli to producers in both countries. However, if it is done between countries at very different levels of development, it is likely to prevent the relatively backward country from upgrading its economy. In the short run, even the weaker country may benefit from having larger markets, but in the long run it will be prevented from moving into new higher-productivity industries. This is because competitive stimuli when the productivity gap is small are likely to raise productivity of the less efficient producers, but when the gap is large, the weaker producers are likely to be wiped out before they can raise their productivity to higher levels. Given that Korea's average productivity level is only around 30-40 percent that of the United States, this is the likely outcome in the case of the Korea-U.S. FTA.

Following this logic, we can see that in the Korea-Chile FTA, Korea is the long-term beneficiary. In the case of the Korea-Singapore FTA, Singapore is more advanced, but the productivity gap is much smaller than in the U.S.-Korea case and also Singapore is a small country, so the negative impact is likely to be small.

KH: Regarding the issue of the Samsung probe and recent prosecutorial raids, how should the incoming Lee government deal with the case?

Chang: Law breaking should be punished. There is no question about that. But the problem is that what is pushing Samsung into those activities is structural, not simply a matter of Samsung being "bad." Korean conglomerates built up their current ownership structure, based on complex "pyramid" structures, under the assumption that there would be no hostile takeover and that the capital market would remain closed. When these assumptions were undermined in the changes that followed the 1997 financial crisis, the ownership structure became very vulnerable, which is what has prompted Samsung (and indeed many other conglomerates) into dubious financial manipulations. Unless we change that structurally, there will be more cases like Samsung. We need to sit together and work out a solution to this problem.

KH: Staying with the conglomerates, the decision to allow Samsung and other chaebol to freely invest in banks has been a controversial issue, with some fearing that this will again lead to the reckless spending of the pre-IMF era. The President-elect has pledged to boost the economy by lifting corporate restrictions to encourage more capital investment from both home and abroad. Conglomerates sitting on huge sums of cash, have supposedly sat on their hands due to the perceived anti-corporate policies of the Roh administration.

Chang: "Separation of finance and industry" in itself may or may not be a good thing. The United Kingdom suffered from finance being too detached from industry, while Germany and Japan developed on the basis of close links between finance and industry. It all depends on how you design the regulatory institutions.

At one level, when we allow private equity funds registered with totally un-transparent governance structures and registration in tax havens to majority-own banks, I don't see why there should be such severe restrictions on Korean conglomerates in this regard. However, it is also true that there is a danger of abuse. In the build-up to the 1997 financial crisis, many business conglomerates used non-bank financial institutions they owned as their "piggy banks." Naturally, people are worried about a repeat of this. However, this was also when there was virtually no regulation on the operations of those NBFIs. If there are good regulations, ownership of banks by conglomerates need not lead to such problems.

KH: Going back to the issue of welfare programs, Lee has also recently announced plans to drastically downsize the government, to ensure an efficiently run administration. By implication, this also means a reduction of government services. Is this a case of "less is more"?

Chang: Smaller governments are not necessarily better governments. If that were the case, poorer countries, which as a rule have smaller governments, will have better governments than richer countries, which is patently not the case.

Cuts in social welfare programs is the last thing that Korea needs. As it is, Korea has a very small welfare state, given its level of income. It spends about 7 percent of its national income on social welfare, compared to around a quarter of national income, which is the OECD average. Its welfare state is smaller than many Latin American countries that are much poorer and have much younger populations.

A welfare state is necessary not only to provide decent living standards to all but also to make more efficient economic adjustments. A welfare state provides 'insurance' against economic shocks and therefore allows people to become less resistant to changes. Through this insurance, it also enables people to take more risk in their career choices. These are why countries like Sweden and Finland grow faster than the United States while maintaining high levels of equality.

KH: Finally, what other key factors do you think Lee's incoming administration should address in order to improve South Korea's economic prospects?

Chang: The incoming government needs to accept that Korea's economic problems today have been built up over the last 10 years and therefore that they cannot be fixed right away. It should not get obsessed with producing visible results in the short run. It needs to be cautious. For example, even if it thinks the FTA agreement with the United States is good (a view which I strongly disagree with), it should at least delay its ratification until it sees who wins the U.S. presidential election and how the U.S. trade policy is going to change. "Don't rush" is what I want to say, although given the way the transition team has been behaving, I am not too hopeful about this.

Professor Chang Ha-joon may not necessarily agree with the entirety of the MB economic doctrine, but the president-elect nevertheless enjoys an overwhelming public mandate to carry out his economic policies in the initial phase of his administration. However, the 747 pledge and disputes over certain initiatives such as the Grand Canal project face a hefty amount of public and political skepticism. Just how pragmatic, and more importantly, how effective those economic policies end up being will be a development closely scrutinized by scholars such as Chang.

In part two of this interview, Professor Chang will discuss his overall economic philosophy and how it shapes his outlook on the Korean economy.
 

[레밍턴스틸(요다)]

읽어볼만한 글입니다. 우리나라 경제에 대해서 그리고 이명박 정부의 기치에 대해 그간 가지고 있던 저의 관점을 다시금 생각해 볼 기회를 주네요.

[치루마]

재밌다.. 이거 2편은 아직 발표 안 된 건가? 장하준 교수 말이라면 새겨들을만 하지. 경제논리로만 판단하는 세상이 얼마나 터무니없는지 사람들이 빨리 깨달아야 할텐데...

[레밍턴스틸(요다)]

2편은 아직 안나왔어요. 경제 현안에 대해 정부가 가져야 할 방향성에 대해서 알아듣기 쉽게 설명해 주네요. 저도 완전 개방형 자유시장이 최선이라는 생각을 가지고 있었지만 재고해 봐야겠어요.