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[Editorial] Boost Overall Consumption

Posted February. 05, 2008 03:01,   


An old lady selling fish on the streets in an open-air market in Bongcheon-dong, Seoul, caught President-elect Lee Myung-bak who visited the market yesterday and cried, saying, “Market conditions are very poor.” Economic conditions perceived by the public are as cold as the weather. Homemakers greeting the Lunar New Year’s holidays hesitate to spend money due to job insecurity and rising consumer product prices.

The LG Economic Research Institute released negative prospects, saying “The economic misery index, which combines the perceived unemployment rate and the price growth rate, had stayed at 9.2 until the third quarter of 2007. However, it soared to 9.9 in October, 10.8 in November and 12.0 in December. If it keeps growing, it may reach 11.6, which is the average figure of 2004 when the Korean economy seriously suffered from falling domestic demand due to the burst of credit card bubble.”

Korean businesses’ investment into facilities has grown around three percent every year since 2000. Such a low growth rate is matching with ‘old’ economies. It is tough to encourage corporate investment when consumers tighten their purse strings. Certainly, investment without consumption only results in excess supply and financial difficulties of businesses. In short, a lack of spending invites investment contraction.

Spending in the private sector has notably decreased. In Korea, private spending accounts for between 50 and 55 percent of gross domestic expenditure, far below 70 percent of the U.S., and 57 percent, average of OECD member countries. Koreans cannot spend happily even when they want to spend. Worse, they don’t have much money to spend. Even consumers belonging to middle income bracket have no choice but to cut their spending since they are burdened with heavy taxes, national pension and health care premiums, and rising loan rates. On the other hand, consumers belonging to the high income bracket go overseas to spend money in order to avoid high prices, heavy regulations and envious glare of others. Korea’s service deficit, mainly resulting from overseas trips and study, shattered all the previous records, reaching $20 billion in 2007.

It is not right to resort to patriotism, while urging the people to control their overseas spending. Foreigners frequently complain about sky-high prices in Seoul. If the government cuts taxes and regulations, it can contribute to lowering high-quality service charges a lot. Students spend 2 trillion won every year to go overseas for several months to learn foreign languages, and golfers spend 1 trillion won at overseas golf courses each year. The Bank of Korea analyzes that if those students and golfers spend money in Korea, there will be a balance between Koreans’ overseas spending and foreigners’ spending in Korea, thus creating at least 257,000 new jobs.

The government also needs to reconsider its special excise tax levied on electronics, golf courses and hotels. Its tax policy, boiling down to “torturing the rich via heavy tax,” can be understood as a wrong policy, failing to see the big picture of the capital flow and catering to the feelings of the poor. Only when the rich spend their money in Korea, the money can flow to the underprivileged like the old lady selling fish on the streets. Along with financial and monetary policies, the government also needs to establish effective policies to boost spending at both ends of wealth’s spectrum.