Estonia vs. Paul Krugman

All presidential hopefuls in Korea have emphasized the people’s livelihood but have presented different solutions. The main opposition Democratic United Party seeks to increase taxes on conglomerates and the rich and expand welfare as a solution, while the ruling party wants to expand welfare without a tax hike. In the hours-long private-public sector joint forum on Saturday, participants demanded that "everything that can be deregulated” en masse. An assessment of economic ideology conducted by The Dong-A Ilbo suggests that the more leftist a candidate is, the more strongly he or she supports a tax hike. The more rightist a candidate is, the more supportive he or she is for deregulation. So whose solution is right?

New York Times columnist Paul Krugman emphasizes a tax hike on the rich and expansion of government expenditures and welfare. He is a Nobel laureate in economics whom the late former President Roh Moo-hyun repeatedly quoted in his book “the Future of Progressivism.” Simply put, Krugman is a leftist. Estonia, a small but strong country in Northern Europe, has launched cyber warfare against Krugman. He wrote in his blog post “Estonian Rhapsody” in early June that in a crisis situation like this, countries should never use contractionary fiscal policy as instructed by the International Monetary Fund, saying “Look at Estonia.” He warned that if countries reject his solution, they will suffer a similar fate.

Less than half a day later, Estonian President Toomas Hendrik Ilves on Twitter posted biting criticism of the economist, saying, “Look at Krugman, who makes remarks of nonsense.” Afterwards, he blasted Krugman almost every 10 minutes, saying, “Is it wrong to keep fiscal balance,” adding, “We`re just dumb & silly East Europeans. Unenlightened.” When Estonia saw its economy contract 18 percent in 2008, when it was dealt a devastating blow by the global financial crisis, the country used strong austerity measures to keep government finances in the black. It cut pay for civil servants, kept its corporate tax rate at a highly generous 12.5 percent, and further deregulated. As a result, the tiny country achieved economic growth of 7.6 percent last year. High-tech companies are scrambling to hire new employees. The country did not follow Krugman’s model but demonstrated that a rightist solution proved to be right.

Krugman said, "It is the situation in that country," if belief and conviction is too strong, theory can be phantom and the reality may not be visible. If one sees the Estonian economy from 2007 as Krugman did, the situation this year has not reached the level of 2007, when the country enjoyed an unprecedented boom. But when considering the situation from 2000, the Estonian economy has clearly recovered and constantly improved overall. Korea also has experience of overcoming the Asian financial crisis in 1997 through deregulation and economic liberalization. Can Korea overcome its economic problems through growth-friendly policy, while alleviating poverty and social polarization through social policy?

Editorial Writer Kim Sun-deok (yuri@donga.com)