With the launch of the new government, changes are taking place in Korea’s economy. On May 10th, Moon Jae-in took office as Korea’s 19th president and his government’s economic policies have been taking shape. We will take a closer look at the new administration’s policies that will lead the economy for the next five years, and how it plans on overcoming some of the imminent issues with Professor Choi Bae-geun of Konkuk University’s School of Economics. Let us first take a look at the Moon administration’s economic policies.
President Moon Jae-in’s economic policies have been dubbed “J-nomics”. The “J” is from Jae-in and the “J-curve effect”, which means things may be difficult at first, but future growth is possible. The difference from previous economic policies is that past policies focused on the trickle-down effect. In other words, the focus was on corporate investment so the benefits could trickle down to households. But many believed that this was not effective. So, there was a shift to invest more in people, with the government providing more jobs, especially in the public sector. Also, Moon’s economic policy promises to invest heavily in education and social services related to quality of life, such as healthcare or welfare. Through these efforts, the new administration hopes to reduce social polarization and create more jobs, leading to corporate investment and economic growth.
The Moon Jae-in government’s economic policy is called J-nomics, a portmanteau consisting of the letter J from the president’s first name and economics. The biggest characteristic is that it breaks away from past growth models, acknowledging the current low-growth phase as a reality, and tries to resolve social polarization and unemployment within the framework. If past governments tried to create jobs and increase income, investment, and consumption through corporate growth, J-nomics changes the paradigm to put people first, investing in people to save corporations and improve the nation’s competitiveness. In order to accomplish this, the government set up an additional budget of 10 trillion won to create 810,000 jobs in the public sector. It also plans to strengthen national support for the fourth industrial revolution, the sixth industrialization of new agriculture, and the culture, tourism, arts, and physical education sectors. President Moon ordered that a job creation committee be established as one of his first orders of business since taking office, showing how important the problem of unemployment is to the Korean economy.
They say that the economy is on a recovery track but ordinary citizens are not feeling the recovery personally. The current economic growth is led by semiconductor or petrochemical industry exports and related facility investments. However, these industries have low ripple effects on other industries and their employment inducements are low. That's why average households are not experiencing the benefits of these changes. So, we will need to see improvements in the employment figures or household income, and the most important improvement must be made in household debt. Household debt has been suppressing consumption, which is negatively affecting domestic demand and growth. The next step would be corporate restructuring.
There are complex reasons behind the continued slump in domestic demand. Increased unemployment in the manufacturing sector due to industry restructuring, reduced income due to poor employment, and 1,300 trillion won worth of household debt have all contributed in holding back consumption. Therefore the new government has a great burden as it must create new jobs, reduce household debt, and make sure that the recent recovery from increased exports leads to domestic demand all at the same time. These are all daunting tasks but the new government is showing much enthusiasm in tackling these issues, so anticipation is growing that domestic consumption will pick up.
A lot of the political instability had been resolved coming into the first quarter of this year. There was a growing expectation that a new government will take office with the impeachment of Park Geun-hye. Households had tightened their belts and lived amid tension until the end of last year due to the political uncertainty. But as the political situation stabilized somewhat, people are starting to open up their wallets. Looking at the stock market, there has been strong foreign investment because Korea's political risks have minimized with the new government. This has led to a bullish run for the KOSPI index. The new government is trying to use expansionary fiscal policy which will maximize these effects.
The KOSPI index, which had been on a rally, hit another record on May 11th, closing at 2,296.37 on the back of expectations for the new government. The tech-heavy KOSDAQ also closed the day at 647.58, beating the previous high of 2017. These changes are not just seen in the financial markets, as the frozen domestic economy has been thawing with increased exports, improved consumer sentiment, and additional investments. With economic indicators showing better signs lately, Moody's said Moon Jae-in's inauguration relieved uncertainty in the domestic market. However, the Korean economy still has many challenges ahead outside of the country.
There is the security risk related to North Korea's nuclear threat and the US has been pushing for trade protectionism. The US has been demanding a renegotiation of the U.S.-Korea Free Trade Agreement, and there are also concerns that the US could designate Korea as a currency manipulator. Meanwhile, if the Fed begins a period of retrenchment, it could bring difficulties to our financial and foreign exchange market. There's also China. The THAAD issue has already influenced our economy negatively and if the security risks involving North Korea are not resolved, it could lead to a slowdown in growth. In order to resolve these issues, we need to maximize our negotiation skills.
Washington's growing calls for trade protectionism, renegotiations of the U.S.-Korea Free Trade Agreement, and additional interest rate hikes are all threats to the Korean economy. China's economic retaliation against THAAD is also causing concern. To resolve these external risks, President Moon plans on sending special envoys to the US, China, Japan, and Russia to begin talks. In addition, he plans to strengthen trade organization and diplomatic expertise to respond actively on the international stage.
The new government took office in the midst of many difficulties. That is why it must respond and resolve these crises while planning out a new future at the same time. These geopolitical risks and diplomatic problems with the US, China, and Japan are issues that could be resolved by the end of the year. This could help lead to a recovery of domestic demand. Planning out a new future in essence is creating new jobs for the nation's youth. For corporations, creating new jobs is like creating a new profit industry, and for the government, it is a question of strengthening the nation's industrial competitiveness. That is why resolving this issue will bring positive changes for the future of our society.
The Moon Jae-in government was born in the midst of an economic crisis internally and a foreign affairs crisis externally. However, if the government solves the problems that it faces and lays out a foundation for a new start, Korea's economy will have a brighter future.