The Global Economic Crisis
and It’s Impact on the Korean Society - Part II
by Professor Yang-Taek Lim
of Economics and Finance,
Editor’s Note: This paper is divided into two segments, the first of which,
presented in the previous November-December 2011 edition of the Journal,
offered an overview of the recent and on-going global economic situation (c.
2008-present). The second segment, which is presented below, specifically
addresses the current economic situation in
IV. Korea’s Socioeconomic Crisis
1. ‘MBnomics’ Missing
the financial crisis hit
Examples of disagreement among financial departments are as follows: first, the process of the government’s intervention on exchange rate fluctuations. Second, the process of a negotiation on a take-over of Lehman Brothers Holdings Inc. by the Korea Development Bank. Third, the process of HSBC’s giving up on a take-over of Korea Exchange Bank. Fourth, failure to issue foreign exchange stabilization bonds.
reason why authorities could not make smooth agreements like the examples given
above was that each authority had different perspectives on the economic
situation at that time. Even President Secretary for
Because authorities had thoughts about the economy so different from one another, it was obvious that economic policies were incoherent as well. For instance, the government asked the BOK to purchase 25 trillion won of bank bonds to lower interest rates. Minister Kang at the time said that the government was planning to discuss a purchase of bank bonds with BOK at the government audit. BOK quickly clarified their statement, saying “The purchase of bank bonds is just one of plans we have in case the recent crisis worsens”.
Even personal opinions of authorities differ from one another. In case of regulations on loans on real property, Minister Kang called LVT and DTI ‘appropriate’ at inspection of the administration. However, the government made it known that it would relax regulations only 15 days later. Minister Kang also said, “Domestic financial companies are maintaining a sound level of international liquidity” at a briefing after a meeting with financial ministers concerning the financial crisis on September 20th, 2008. Unlike Kang’s statement, many banks at the time were busy searching for overnight money due to a shortage of foreign currency. About 2 weeks later, Kang ordered banks to seek measures to save themselves to solve the problem of liquidity deficit. (October, 27th, 2008)
Head of the Monetary Policy Committee Kwang-Woo Jun predicted that the financial market would become stable anytime soon at the state affairs committee held shortly after the break out of the crisis. The ground on which this prediction was based was the fact that the liquidity was relatively sufficient. In the end, Jun changed his words and admitted the ripple effect of the crisis may be more severe than that of 10 years ago. President Lee and Minister Kang also showed their relatively positive perspective on the current situation, saying “It is not too serious”. President Lee even said during a speech he gave on a radio, “Things may be tough, but it’s a lot different from the crisis in 1997”. Then he as well changed his words and said at a luncheon with police commanders, “Now is more serious than the IMF crisis”.
Financial Services Commission has also worsened the situation. When the world’s
largest bank, HSBC, offered a take-over of KEB, the commission rejected it on
the pretext of the Lone Star Funds, which it did not have anything to do with.
Moreover, it permitted the establishment of eight stock firms in spite of the
plunging stock market. President of KDB Yu-Sung Min at that time said, “We
proceeded M&A of Lehman Brothers Holding Inc. in partnership with the
financial services commission under a judgment that it would promote the
national interest”. He added, “Although the M&A this time did not turn out
to be successful, we will be more aggressive about acquisition of foreign
investment banks”. (Joong-Ang Ilbo, September 17th, 2008) Unfortunately, his
ambition to take over foreign investment banks was just dangerous arrogance,
considering the unstable capital structure of
It would not be an exaggeration to say that misjudgment and ever-changing statements of authorities have been generating distrust. Authorities have damaged trust themselves by making thoughtless remarks and easily changing them.
Functional integration and rational management of financial departments are urgently needed. Functions of economic policies are being divided into parts and separated under a purpose of heightening the efficiency of financial supervisory operation. International financial policy has been allocated to the Ministry of Strategy and Finance, establishment of domestic financial monetary policies and inspection of financial institutions were put in charge of the Financial Services Commission. Also, monetary policy, adjustment of interest rates, and exchange control have become a responsibility of the BOK. Even in times of capital decontrol, international finance and domestic finance are working independently rather than working together.
For stable monetary function of both domestic and foreign finance, the three policies mentioned previously need to be integrated. In addition, the role of the Deputy Prime Minister for Economic Affairs is essential for maintenance of harmonious policies. Government financial departments must devote all their energy to set and operate a complementary circulation structure of real and financial sector.
Economic policies of the Korean government are in a dilemma right now; choosing between long-term supply and short-term demand, increasing and decreasing interest rates, and increasing and decreasing exchange rates.
In this situation, the Korean government chose price control, which could not work. Enforcement of a ‘MB price index’, which controls 52 kinds of daily necessities, makes me feel like I have gone back to 1970’s.
Neither a sharp drop nor a rise in exchange rates are desirable. It’s because rising exchange rates can heighten competitiveness in exports, but deepen inflation. A fall in exchange rates, on the other hand, can reduce prices but weaken competitive price of export businesses. Therefore, exchange rate policy has to focus on reducing the rage of fluctuation.
Nevertheless, Minister Kang devastated the economic situation at the time by enforcing a high exchange rate policy in times of high oil prices. As a result, raising the exchange rate ultimately led to a decline in growth.
The government quickly reduced petrol taxes by 10 percent to stabilize the prices, but this only ended up having no effect as the oil price jumped later on. Despite the upswing in exports, the stagnation in investment continued. The rate of increase in equipment investment for the first quarter was minus 0.4 percent compared to that of the previous quarter.
The government is claiming that the high exchange rate policy turned the balance of trade positive. In fact, it was because of ship exports which hit a new profit record of 49 billion dollars. So it is hard to say that the high exchange rate was the actual cause.
The effect of a high exchange rate on inflation is clearly showing; the rise in the exchange rate accounted for 10 percent of import price increase in April, which was 31 percent. Consumer prices reported on June 2nd, 2008 reached the highest record in 6 years and 11 months.
The high exchange rate was partly responsible for GNI for the first quarter which dropped to minus 1.2 percent compared to the fourth quarter of 2007. Although GDP for the first quarter of 2008 was 205 trillion won, the actual national income was 180 trillion won as a loss in trade amounted 27 trillion won due to aggravation of trade conditions. That is, a rise in the exchange rate intensified the reducing effect of income by heavily raising the price of imports.
Declining real incomes result in a fall in consumption, which ultimately leads to stagnation of domestic demand. Private consumption for the first quarter of 2008 only rose 0.4 percent accelerating decline in private consumption.
Another problem that follows the high exchange rate policy is that it widens a gap between the rich and the poor by increasing the burden on the people.
In the end, the government belatedly became aware of side effects of the high exchange rate and intervened in the market to lead to a fall in the exchange rates. As a result, the exchange rate of the won against the dollar has been decreased to 1,022 won per dollar.
Finance Minister Man-Soo Kang made an announcement that the government would pay between 60 thousand won and 240 thousand won to 13.8 million workers and small businesses under the name of ‘tax refund.’ 9.8 million workers and 4 million self-employed were targeted for the cash payment. The benefited workers comprised 78 percent of total workers (13.8 million workers) and 57.5 percent of the total economic population (24 million persons), and the benefited self-employed comprised 98 percent of the total number (4.6 million persons).
The above-mentioned countermeasure of high oil prices is populism that is hard even for leftists to come up with. This seemingly-generous policy can be interpreted as a measure to settle the public sentiment, however, even communist nations would not waste as much money as 10.5 trillion won.
an official from the Ministry of Knowledge and Economy said, “It takes 2.5
trillion won to build one nuclear power plant. 10 trillion won could have
better been used to build 4 more nuclear plants in times of skyrocketing oil
[Table 1] What can be done with 10 trillion won
The biggest factor of President Lee’s victory in the 2007 election was a pledge to revive the economy, which was falling into recession after having gone through the left-leaning government for 10 years.
Lee’s administration has been established claiming to stand for new liberalism and pledging to revitalize economy. However, as the international economy and new liberalism have been confronted by the crisis, the government appears to have become bewildered and lost philosophy and strategy for management of the nation.
The reason why the financial department seems so lost is that they do not have a macroeconomic blueprint based on firm philosophy in state affairs. Not surprisingly, MBnomics, the economic blueprint of the Lee’s administration, seems to have become stuck at the crossroads of life and death. It’s hard to tell whether the government is going for growth or distribution, laissez-faire or government intervention. Neither ideology nor philosophy of a policy is clear. (Cho-Sun Ilbo, June 14th, 2008)
President Lee defined ‘pragmatism’ as follows at the inauguration on May 25th,
2008: pragmatism is a rational principle that penetrates history of west and
east and practical wisdom that plows thoughts the waves of globalization. He
added, “We have to go beyond the age of ideology and head for the ages of
pragmatism”. He also made a promise to resolve conflicts between classes and
approach the issue concerning
Recent confusion in economic policies was not caused by changing domestic and foreign affairs. Rather, it was caused by lack of vision and philosophy for state affairs, which led to the loss of consistency in policy making. For example, a report titled ‘Designing a Brand Image for the President: The Search for an Ideal Leader based on a strategic President and the Social Consensus’ showed an ironic result that the more a ‘fair society’ is discussed the more the real society is corrupted. The more working class-friendly the government claims to be, the wider a gap between the rich and the poor becomes.
The key is a ‘president who deserves to be a president.’ People want a president who offers a vision, shares social values with people, and tries to have a sincere conversation even with people who take an opposite side. To make a reference to the mentioned report, people no longer perceive the president as only a 7th grade civil servant. They want a president of their own, not of a particular group.
On the other hand, on July 10th 2011, the ruling Grand National party agreed on lowering college tuitions, deregulation on firms, and withdrawal of reduction in the corporate tax. This shows that the key policies of the MBnomics, deregulation of firm and the corporate tax cuts, have been rejected by the leaders of the party. Careful discussion and new, systematic economic policies are required prior when the ruling party changes an economic policy line of the administration. Otherwise, it would be an action disrespectful of both the president and 11.5 million voters.
However, what the author is saying is far from advocacy of President Lee’s economic policy. Rather, I have been raising my voice against the absence of consistency in philosophy for state affairs and a narrow view of the current economic policies. In fact, the author is pointing out that it’s the decision procedure for policy that has gone wrong.
2. Impoverishment of the Korean Society
1) Five Million Poor
poor in Korean society are more and more growing in number. The Korea Institute
for Health and Social Affairs reported that the poor of
The poor can be defined as sum of the following three strata: ① welfare recipients whose monthly income is less than the minimum cost of living, ② the second income class whose income is lower than 120 percent of the minimum cost of living, and ③ the poverty class with no social security benefits who are paupered due to some asset possession and their dependents.
of May, 2005, welfare recipients in
According to the Korea National Statistical Office, the monthly income of the top 10 percent of households was 10 times higher than that of the bottom 10 percent. The top 10 percent spend 590 thousand won a month on education, which was about 7 times that of the bottom 10 percent and twice that of the top 40 percent. The top 10 percent’s monthly expanses on private education was 250 thousand won, 6.3 times that of the bottom 10 percent. Also, there was a huge gap in expenditures for reading, recreation, and dining out among classes. Expanses that the top 10 percent spent on entertainment was 7.6 times that of the bottom 10 percent and 3.2 times that of the top 40 percent.
On the other hand, households that are unable to pay for a health insurance increased from 1.56 million in the late 2003 to 1.72 million in July, 2004 due to a decrease in income. Also, out of 9.8 million health insurance holders, 2.4 million have been unable to pay premiums for 6 months. According to the Ministry of Education and Human Resources Development, in 2004, there were 29-thousand high school students who could not pay quarterly tuition fees.
Those who are incapable of paying taxes due to a loss of job or a business failure are rapidly increasing. In June, 2004, overdue loans of financial firms and households were 12 trillion won in total, which had increased by one trillion won compared to 2003. People who are unable to pay off a rental house and land they have purchased from the Korea Housing Corporation and Korea Land Corporation are increasing as well. In July 2004, overdue housing payments were 200-billion won, an 80-billion won increase compared to the year 2003.
2) Increase in Personal Bankruptcy
According to ‘Money flow trend’ reported by BOK, financial liabilities of individuals in 2005 totaled 602-billion, which was 1.36 times the disposable income that year. This means a person has to spend money that is about 1.36 times his income to pay off his financial debt. Also, individual financial liability compared to GDP sharply rose from 67 percent in 2002 to 74.7 percent in 2006. Insolvency of household is worsening due to an increase in consumption, lending rates, and a fall in mortgage value cause by a decrease in asset prices.
Increase in the number of individuals filling for bankruptcy has emerged as a new threat to the Korean economy. The number of individuals who declared personal bankruptcy has already doubled in number from the year of 2005 to 2006. According to BOK, potential bankruptcies, those who haven’t yet declared bankruptcy, are estimated to be 790-thousand. (Cho-Sun Ilbo, October 25th, 2006). Looking at the society as a whole, personal bankruptcy may create insolvency of financial institutions and another credit card crisis.
to a report by the Financial Supervisory Service in
Looking back, the Asian financial crisis in 1997 can be considered a result of the over-borrowing fund management of big companies. To elaborate, a temporary shortage of foreign currency was caused by firms incapable of paying off external debts. Fortunately, the Korean economy got out of the crisis with the bail-out of the IMF and the patriotic sales of the possessed gold of the Korean people to pay off some foreign debt. Later, the successful securing of foreign investment and a rise in exports helped the economy strengthen its foreign exchange reserves. The recent crisis is chronic and long-term, whereas the Asian crisis in 2007 was acute and short-term.
In fact, unlike firms, inventories and machine equipments of which banks can take as security, households have nothing left when asset value drops. This situation holds the possibility of resulting in a more complex crisis. Thus, in order to save insolvent households, business investment should be revitalized. If the market rebounds due to deregulation, floating money will rush to stock markets, increasing employment. This will also increase household income, reducing debts.
3) Increase in Divorce and Suicide
Poverty does not simply mean economic insufficiency. Poverty destroys families and leads people to suicide. Divorce and suicide are increasing day by day. Financial stress is responsible for a sizable proportion of divorces, increasing from 10.7 percent in 2000 to 16.4 percent in 2003. People who committed suicide because of business failure and poverty have sharply risen as well. Suicide rates have been steadily increasing since the Asian crisis in 1997, and worsened lately. The year 2003 broke the 1997 record with 731 people who took their lives out of despair for poverty. Suicides triggered by business failures reached the highest record in 2003 as well, breaking the record of 595 in 1998.
35.5 people a day committed a suicide in 2006. The number of suicides in 2006 was 12-thousand, which was as twice as the number of deaths from traffic accidents in the same year. One thing to notice is that out of the number of suicides in 2006, people over the age of 61 were 33 percent, and 31.9 percent were women.
the financial crisis in 2008, the number of suicide deaths in
Comparing an age distribution of suicides of the year of 2009 with that of the 1990’s, 5.4 times more men who are over 65 and 1.6 times more people aging from 25 to 44 committed suicide. It shows that suicides of the aged are rapidly increasing, tripling those of the young. Old women are also showing the same aspect. The poor and sick aged are choosing to kill themselves to lighten the burden on their children.
Suicides triggered by depression are increasing as well. 20 out of 100-thousand Koreans kill themselves – this is double the average rate of OCED countries. Especially, it is a tragedy that suicide is the number one cause of death of young people aged from 20 to 30. It’s a reality that saddens us, like watching eyes of a dying deer. (Jugendlegende Begegnungen an Abend, Anton Schnack, 1892~1961)
What’s worse, psychopathic murders continue to rise. Ho-Soon Kang, a serial killer who expressed his wish to make profits by writing a book about the murder he had committed, reflects one side of the Mammonish (i.e.: materialistic) age we are living in today.
Families are becoming smaller, lives are getting longer, and the income gap is widening. If we do not deal with the current problems of the aged, Korean society will be in danger of breaking up.
Furthermore, more and more people are likely to die in solitude. According to population consensus data of 2011, single-person households account for 23.7 percent of the total households. In other words, one out of four households comprise a single individual who lives alone. This means single-person households have increased 20 years faster than NSO had predicted. What is so serious about this is that an age group of single-person households is expanding to people ranging from twenties to fifties; people in their 40s and 50s were 29.9 percent, and 20s and 30s were 23 percent of the total single-person household population.
4) The Lowest Level of Social Safety Net and Social Indifference
With the world’s worst level of social safety, nuclear families are accelerating the neglect of the aged. The aged have become the weakest class in Korean society. In elderly society, increase of the aged is unavoidable. If no measures are taken to solve this problem, suicide among the elderly will likely continue.
Korean society should be apologetic to all those who were swept away defenselessly by the rush of the currency crisis in 1997, the recession in 2003, and the global economic crisis in 2008. Koreans should also reflect on an absence of a social system that prevents an economic crisis from causing social problems and takes care of those in need.
the income gap in
The Bush administration’s plan to repeal the inheritance tax was severely criticized. At the time, social figures who openly voiced their opposition to the repeal of the tax were billionaires like Warren Edward Buffett, George Soros, and William Gates senior. It was possible because there was a strong social awareness of inheriting wealth.
5) Lack of Noblesse Oblige and Corruption of Public Officials
Despite what the rich in American have shown, noblesse oblige is still the last thing to expect from Korean officials. Following are examples:
I strongly believe that the case of
Busan Savings Bank is the most abominable even that has ever happened in
People have become deeply indulged
in an idea that the government should not intervene with the market as new
liberalism swept the nation in the early 1980’s. The market can be adjusted by
itself, so it has to be left alone. However, the crisis that originated in
This crisis resulted from the government’s failure to control the economic system. The role of the government is to create institutional devices to lead economic subjects to making fair transactions and obey the rules of the market. In that sense, terms that are being overused in the Korean society such as ‘business-friendly’ or ‘anti-business’ show how much our society lacks in philosophy of economy. What is really important is not whether or not it’s ‘friendly’ nor ‘anti’, it is how strict the government is on economic units.
A number of the administrators of the tax service, who are in charge of the pursuit of ‘taxation justice,’ resigned or were legally dealt with. For instance, one of the retired administrators of the tax service was arrested for taking bribery from his men. Another administrator resigned under the suspicion that he had bribed his superior administrator for whom he was an assistant.
Three air force officers including
the Air Force Chief of Staff were charged with giving away state secrets to
Lockheed Martin on August 3rd, 2011. “Koreans just feel so despondent about the
fact that the supreme commander of the armed force has been handing over state
secrets to foreign companies. It is beyond anger, it is disgrace”. (Cho-Sun
Ilbo, August 5th, 2011) In contrast to
There are also many welfare dealers who steal subsidies that are given as a budget to build elderly care facilities. The total welfare budget for 2009 was 74.7-billion won. It was found that this budget had been filling the pockets of shameless welfare officials in 130 nationwide districts, instead of going to the poor, the disabled, jobless, and the aged.
On the other hand, it seems to me
Moreover, hoof-and-mouth disease
broke out in An-dong, in the Province of Kyoung-sang, is spreading throughout
the nation with the exception of
of the reasons why a contagious disease among animals brings about great losses
is lack of communication among the central government, the local government,
and the industry. It eventually resulted in a failure to take immediate action
on the spread of the disease. Although the environment of
Ⅴ. Concluding Remarks
Since the global economic crisis, all of us on this planet have been going through a long and cold winter. It is expected that such pains shall be unfortunately sustained for as long a time as the Great Depression lasted; that severe and sustained downturn dragged on from 1929-39, and did not actually recover until World War II (1939-1945).
Thus we must find a way to survive
ourselves rather than to sit and wait for the world economy to recover on its
own. At the same time, we – the people -- must take some time to look back on
ourselves and reconsider the philosophy of life. We are witnessing people
buying so many clothes that they will wear only a few times, and easily buying
a car on the installment plan. The past years might have been the most
luxurious period of our time. We will have to change our society from a place
in which money and powers are the most important values to a place in which the
pursuit of a desirable human character is the top priority. The title of a
Gauguin’s piece, exhibited in an art gallery in
author (Yang-Taek Lim, 2008, 2010, 2011) has recently proposed a new philosophy
named ‘Neopragmatism’. He reviewed the philosophy of the East with that of the
West and lighted upon the ‘realistic idea’ of the late Chosun (old name of
Neopragmatism values consequential performance as well, but puts emphasis on the means and process of reaching a choice, i.e., how democratic the choice is. Thus, it considers ‘morality’ more than ‘state rationality’, and thus, does not consider that truth and utility are identical. No matter how important ‘being full and warm’ and ‘society with well-off middle class’ are, not only should the ways in which to achieve ‘national identity’ be clearly different, but there should also be a clear ‘national choice’.
The strategic goal of ‘a democratic society for the greatest happiness of the greatest number’ in neopragmatism is to follow sustainable growth with full employment, stable prices, and equitable income distribution. This is because, as A.C. Pigou (1952) stated, ‘growth, distribution, and stability’ are the prerequisites for maximizing welfare of a given society as a whole. Consequently, ‘Neopragmatism’ pursues not only ‘freedom’ but also ‘equality’ in opportunity, and furthermore ‘equity’ in income distribution. Freedom, equality, and equity are materialized through economic and social development. And these conflicting values can be harmonized by pursuing sustainable growth with full employment and distribution simultaneously.
The practical method of Neopragmatism is to heighten the nation’s competitiveness through Schumpeterian ‘Techno-Economic Development Strategy’ (Yang-Taek Lim, 2006) based on Joseph Schumpeter (1933 and 1942). In a market economy system, the core of a nation’s competitiveness is enterprise competitiveness, which is created by: resource competitiveness → development and manufacturing competitiveness → quality competitiveness → market competitiveness → customer satisfaction. Competitiveness regarding price and non-price is then heightened, which leads to international competitiveness, a favorable balance of international payments, and then to coexistence and harmony of growth, employment, and distribution.
To promote Neopragmatism, national leader’s leadership is most important, needless to say. Three features are required for a leader. First of all, a leader should lead factions and conflicts between them into harmony. Secondly, through education, a leader should show new behavioral models and a will to accomplish. Lastly, a leader should promote productivity by indicating a vision to the constituents and make them become aware of goals, challenges, and achievements.
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