Go to contents

[Opinion] Execute a `Go – Stop` Economic Policy

Posted January. 18, 2002 09:43,   


As unemployment rose after World War II, Britain interchangeably executed a `go` economic policy to expand the economy and a `stop` policy that suppressed domestic demand in order to balance the national budget.

In other words, they executed a `go-stop policy` to achieve an internal and external balance. The idea of a `go-stop policy` is also used with frequency in regular economic policy rather than just for achieving external and internal balance.

The U.S. implemented a `go policy` to revive its stagnant economy and lowered interest rates eleven times last year. Our country also lowered interest rates four times last year and after the September 11 attacks on the U.S., we implemented various economic support plans for fear of negative impact on the economy.

A `go policy` however is not the only solution. Interest rates are lowered to increase investments, but this may lead to a liquid pitfall where new investments do not increase. When the economy falls into the liquidity trap, the economy goes into a long-term recession as in the case of Japan. The economy loses momentum and businesses that profit from investments begin to disappear. We must also be aware of this danger.

Adverse effects of lowering interest rates are beginning to appear here and there. Money wonders about in the open market, not knowing where to go because of the low interest rates.

Money began to concentrate in the real estate market, particularly the apartments and caused apartment prices to skyrocket last spring. Due to the low interest rates, property owners began demanding monthly rent rather than yearly rents, and placed a greater burden on the already bent backs of the taxpayers.

Moreover, many in the populace are trying to realize their dream of purchasing their homes, even if it proves straining, while apartment prices recently surged due to the distorted schooling fervor, all of which is creating unearned income from resale and transfers of parceling rights.

Shop and office renters are raising their voices about the surging rent prices and complaining that they cannot conduct their businesses. When the rent rises, the leaseholders have to raise merchandise prices at least equal in amount to the rent. This, in turn, will cause consumer prices to rise.

The stock market is not an exception. Although interest rates may have gone down, it is still lower than the rates in the U.S. and other foreign nations. Consequently, foreign capital is flowing into the domestic market and the stock market is getting strong. Small time investors also avoid the pathetic interests of bank accounts and play the market, increasing market strength.

Yet, without the economy having revived or the various economic indicators completely confirmed – in other words, without the fundamentals in their proper places – no one can predict how long this long-term liquidity will continue.

After the U.S. witnessed the stock market quickly contract immediately following September 11, it appears to be silently anticipating the market to strengthen. One only hopes, desperately, that it will not end up in a cloud of smoke like before. We need a `stop policy` to stop this kind of thing from happening.

However, our administration has announced its plans to implement major economic supports and adjusted its projected economic growth rate at 4 percent.

Compared to the 3.2 percent rate projected by the IMF, we are aiming for a higher goal, but this is not the time to be attached to superficial growth.

If we turn to an expansion policy without having completed the structural reforms, which we have worked on until now, our economy can fun into difficulties yet again. This is why we need a consistent economic policy.

Also, we will spend this whole year sleeplessly concerned about various elections and the growing potential for political debates to shake the economy demands greater attention on executing the economic policy.

Since the National Election Commission has allotted 200 billion won for overseeing the elections, the amount of money that the candidates will use for their campaigns will probably exceed imagination.

Furthermore, one worries about election inflation and both parties` excessive policy promotion causing more strain on the economy.

The task before the administration in transition is not continually pushing the economic support policy, but to use a `go-stop policy` through which it can examine adverse effects of the policy, supplement its faulty or weak points, and complete the structural reform process.

Yoon Yong-Man (University of Incheon, Professor of Economics)