The general elections two weeks ago again proved economy and livelihoods matter most to voters. The main deciding factors were the hardships faced by people and inflation, highlighted by the high prices of daily staples such as green onions and apples. Similarly, despite good macroeconomic indicators in the U.S. economy, a commensurate rise in U.S. President Joe Biden’s approval rating did not take place, due largely to sticky inflation adding pressure to people’s livelihoods. With high inflation and economic difficulties, it has become rather hard to win over the voters.
As soon as the general elections were over, prices of food and consumer products started to increase. For example, the price of chocolate products increased by 12 percent immediately after the general elections. The increase is steep even with rising prices of raw materials and exchange rate hikes factored in. According to the OECD, Korea’s inflation (6.95 percent) far exceeded the OECD average (5.32 percent).
In addition, oil and energy prices are unstable due to rising tensions between Iran and Israel in the Middle East although it looks unlikely to develop into an all-out war. Theoretically, if Iran blocks the Strait of Hormuz, a major crude oil transportation route, oil prices are forecast to soar up to $130 per barrel. This would be a double or even triple whammy for the Korean economy, as Middle Eastern oil accounts for 72 percent of Korea's total oil imports.
Also, the high number of self-employed people, which accounts for about 20 percent of the total workforce, is particularly affected during economic downturns, widening the income gap and intensifying polarization. Many of them have not recovered from the hardships caused by COVID-19.
The factors that determine people's livelihoods are diverse and require short-term and medium- to long-term measures. The Confucian concept of "Gwondo," measures taking into account the situation of reality, is in great need to be implemented.
Targeted fiscal stimulus measures are needed to respond to the economic difficulties of certain segments of the economy. They include an expansion of policy funds and low-interest refinancing loans for self-employed and small business owners and more investments in startups. Certainly, concerns about fiscal soundness and inflationary pressures are only relevant, particularly in view of the increased national debt-to-GDP ratio, which stands at 50.4 percent as of 2023 and the continued sticky inflation. A total of 50.4 percent may not be so terrifying for many other countries but for Korea, the 50 percent threshold was an unknown world.
However, it cannot be more relevant than supporting those in dire need who are a critical part of the economy. Their continued hardships could be attributed in part to a smaller fiscal stimulus than provided in other countries as a response to COVID-19. Korea spent only 3 percent of GDP whereas the United States spent 16 percent and Japan 15 percent. Continued hardships for a sizeable segment of the economy will eventually lead to unbalanced growth and thus a weaker economy. The Korean government should be more proactive in its fiscal policy in times of extreme difficulties as fiscal soundness is not an untouchable positive good. Political leadership should know when to deploy Gwondo fiscal support measures and mandate the bureaucracy to deliver.
The International Monetary Fund (IMF) also stressed at its spring annual meeting last week the importance of fiscal stimulus as measures to increase growth, along with early interest rate reduction, productivity improvements through AI development and structural reforms.
Sound fiscal policy requires sound tax policy. Various unnecessary and unreasonable tax cut policies announced to win over voters before the general elections should be removed. Enhancing accuracy in tax revenue estimation will greatly help, too. The Korean government’s effort to improve its tax revenue estimation models in partnership with the IMF by as early as July is commendable, given the huge tax revenue estimation errors for the last three years. In 2021 and 2022, excess tax revenue was collected more than expected, and the amount of tax revenue error in 2021 was 61.3 trillion won, resulting in an error rate of 21.7 percent. It was 15.3 percent in 2022. In 2023, a deficit of 56.4 trillion Korean won occurred due to insufficient tax revenue, and the error rate was negative 14.1 percent. The size of the deficit was the largest ever since statistics were compiled.
Promoting price stability is a tall order when the economy is exposed to high inflation, high interest rates, high exchange rates and external geopolitical risks. But it also is a good time to start tackling a long-overdue task on the domestic front. Strongly entrenched middleman distribution cartels, often taking unjustified profits and thus increasing consumer prices, have long been identified as critical links that need improvement. Competition-inhibiting practices and unfair and excessive subsidies to the distribution cartels are some of the areas the authorities should look into. The use of artificial intelligence will likely help upgrading and effectivizing its distribution system, thereby lowering prices.
Dr. Song Kyung-jin (kj_song@hotmail.com) led the Institute for Global Economics, based in Seoul, and served as special adviser to the chairman of the Presidential Committee for the Seoul G20 Summit in the Office of the President. Presently, she is executive director of the Innovative Economy Forum.
To people, livelihoods matter most
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6
23.04.2024
The general elections two weeks ago again proved economy and livelihoods matter most to voters. The main deciding factors were the hardships faced by people and inflation, highlighted by the high prices of daily staples such as green onions and apples. Similarly, despite good macroeconomic indicators in the U.S. economy, a commensurate rise in U.S. President Joe Biden’s approval rating did not take place, due largely to sticky inflation adding pressure to people’s livelihoods. With high inflation and economic difficulties, it has become rather hard to win over the voters.
As soon as the general elections were over, prices of food and consumer products started to increase. For example, the price of chocolate products increased by 12 percent immediately after the general elections. The increase is steep even with rising prices of raw materials and exchange rate hikes factored in. According to the OECD, Korea’s inflation (6.95 percent) far exceeded the OECD average (5.32 percent).
In addition, oil and energy prices are unstable due to rising tensions between Iran and Israel in the Middle East although it looks unlikely to develop into an all-out war. Theoretically, if Iran blocks the Strait of Hormuz, a major crude oil transportation route, oil prices are forecast to soar up to $130 per barrel. This would be a double or even triple whammy for the Korean economy, as........
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