hankyoreh

June 18. (Provided by Cheong Wa Dae)

By Ahn Seon-hee, Staff Writer　

“A country’s economic management policy is like a great big aircraft carrier. The Lee Myung-bak administration set its aircraft carrier in wrong direction from the beginning, and now it is headed into the danger zone. At this point, it is losing even the strength to move and is simply floating there, going neither backwards nor forwards.”

This was the analogy offered by Kyungwon University Economics Professor Hong Jong-haak for the situation currently facing the Lee administration. It is now dealing with the eruption of issues that have festered over the past three years of so-called “MB-nomincs,” including snowballing household debt, high prices, stagnant domestic demand, and worsening polarization, and finds itself surrounded on all sides, with pressure even from the ruling party to change its policy emphasis. But in continuing to respond with stopgap measures while avoiding a fundamental shift in policy, it is succumbing to contradiction by presenting conflicting policy goals, to say nothing of adequate countermeasures.

According to accounts Sunday from the Ministry of Strategy and Finance (MOSF) and Financial Services Commission (FSC), the government plans to announce economic policies for the second half of 2011 within the month, including measures to address household debt and the stimulation of domestic demand. The reason has to do with growing fears of a “hard landing” as household debt continues to mount, along with a deterioration of economic sentiment owing to stagnant domestic demand that is severe enough to have President Lee himself ordering that measures be taken.

Analysts say the household debt measures are likely to include steps to rein in the rise in loans and increase long-term, fixed-interest loans, while the domestic demand measures will include steps to promote the tourism industry, deregulation of the service industry, and support for traditional markets and small and medium enterprises (SMEs).

The problem is the strong likelihood that the two policy goals will come into conflict. At a time when polarization is resulting in stagnant middle class and working class incomes, the addition of strong curbs on loans would inevitably mean even lower levels of domestic consumption.

“We need to aim for price stabilization, and household debt is also in a serious state, but we cannot adopt the measures used by the government in the past, such as credit card issuance and steps to boost the real estate economy,” said a MOSF official. “Our emphasis will be on expanding the supply base.”

But with consumers out of spending money, it remains in question just how long a supply expansion can last without being shored up by demand.

Financial policy has likewise lost its rudder. In April, the Lee administration made an early declaration of an “austerity budget” approach, announcing that it would maintain the rate of increase in government expenditures at two to three percentage points below the rate of increase in revenues when drafting the 2012 budget, for the sake of financial soundness. The message was that the government would be tightening its belt to reduce debt due to a sharp rise in household debt stemming from the financial crisis, large tax cuts, and other factors. The administration adopted an approach of dismissing demands for expanded welfare services as “populism” and working to block them as much as possible.

But with popular demand for welfare services growing by the day, the Lee administration is finding it harder and harder to adhere to its policy of reining in expenditures. Last month, it officially announced the implementation of free childcare for children up to five years of age.

The Lee administration’s inconsistent approach is most clearly evident in its insistence on additional tax cuts in 2012. Even while presenting “financial soundness” as a golden rule, it has not changed its position on the continued need for additional tax cuts that reduce tax revenues by four trillion won ($3.7 billion) every year. Its intent appears to be to chase after three rabbits moving in different directions, namely tax cuts, financial soundness, and an expanded social safety net.

Experts are saying that a bolder shift in policy is needed to resolve the knotty array of economic issues. Their claim is that increasing real income among the working class by relieving the gap between large corporations and SMEs, reducing temporary positions, raising wages, and expanding welfare services represents a fundamental solution for resolving household debt issues and stimulating domestic demand.

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