[New Year Interview] 'Foreign Exchange and Financial Crisis Savior' Jeon Gwang-woo "Government Should Remove Obstacles Rather Than Lay Stepping Stones"

Jeon Gwang-woo, Chairman of the World Economy Research Institute, is being interviewed by Asia Economy. / Photo by Moon Ho-nam munonam@

Obsessed Only with Economic Growth Rate Numbers and Rankings

Government-led Economic Revival Based on 'Fiscal Omnipotence'

Side Effects Everywhere, Including Young Generation's 'Yeongkkeul' Investments

Focus First on Cost-free Economic Stimulus Measures Such as Corporate Support, Deregulation, and Labor Reform

Need to Strengthen the Self-sustainability of Private Companies First

[Asia Economy Reporter Kim Eun-byeol] Jeon Gwang-woo, Chairman of the Institute for Global Economics (IGE), showed mixed feelings when looking at the COVID-19 crisis. In 2008, he also served as the inaugural Chairman of the Financial Services Commission, bearing the heavy responsibility of minimizing the shock of the financial crisis that year. Regarding the unprecedented COVID-19 crisis response, Chairman Jeon advised, "The government should focus more on ways to ensure the economy can land smoothly after the COVID-19 crisis rather than immediate cash support."

In a New Year interview with Asia Economy Newspaper held last month at the World Trade Center in Samsung-dong, Seoul, Chairman Jeon asserted, "What the government should worry about this year is not the economic growth rate figures or rankings, but creating a foundation that allows the economy to properly rebound and finding ways to add vitality when escaping the COVID-19 crisis." He said, "It is not the time to emphasize that international organizations say there is fiscal capacity or that Korea's growth rate shock last year was less severe." He added, "There are cost-free economic revitalization measures, such as deregulation that companies have long desired, so there is no reason to conduct current fiscal stimulus measures that burden fiscal soundness by spending money." In other words, the government should actively consider ways to stimulate the economy by supporting companies and easing regulations?methods that require less spending.

Chairman Jeon, who has experience overcoming past crises, is most concerned about the current government's fiscal omnipotence. Although unprecedented levels of monetary and fiscal policies were inevitable last year, he argues that responding only by distributing large-scale disaster relief funds, government-led public jobs, and the Korean New Deal has limitations. Policies that only inject money inevitably reduce economic vitality and cause side effects such as young people concentrating solely on risky asset investments like stocks. Recalling the financial crisis 12 years ago, he said, "The government was necessary in the initial response, but during the recovery phase, the private sector led the economy," and "It is time for the government to consider the role of the private sector." He also said that government-led industrial development can never match private-sector-led economic revitalization. He pointed out that increasing private jobs and solving employment and real estate issues for people in their 20s and 30s are prerequisites for marriage, and showing a national future vision is necessary to raise the birth rate. Chairman Jeon emphasized, "The government keeps trying to lay stepping stones, but the government's role is rather to remove obstacles."

Below is a Q&A with Chairman Jeon.

"The Government Should Not Just Hear That It’s Okay to Spend More Money"

-Last year, Korea's economic growth rate (-1.1%, Bank of Korea forecast) was reportedly the highest among OECD countries.

▲It is true that Korea performed relatively well among OECD countries. But is it right for the government to boast about this result? The background for the relatively good growth rate includes factors such as Korea's key large corporations in semiconductors and automobiles benefiting from COVID-19-related demand. If last year's growth rate had fallen more, this year's rebound would naturally be smaller, resulting in an average growth of about 1% over last year and this year. I want to say that there is no need to be overly sensitive to short-term fluctuations in growth rates during crises. If this year's rebound is smaller than other countries', it is time to consider why our economy lacks resilience.

-The government introduced the 'Korean-style Fiscal Rules' amid rising national debt.

▲It is desirable to create guidelines to secure fiscal soundness as much as possible. However, there are some problems. First is the timing proposed to apply from 2025. Another government will be in office then, so saying 'we will start next time' is unreasonable. Another issue is the exception clauses during crises. No matter how good the rules are, they are meaningless without the will to follow them. Look at the social distancing levels during COVID-19. Although a level 3 standard was set, the government keeps adjusting the level to 2.5+alpha. They know that raising distancing levels burdens the economy, but the standards were made in advance, so if they are not followed, can we really call it fiscal rules?

-International organizations say Korea's fiscal condition is sound.

▲Having worked at the World Bank for nearly 15 years, I know that international organizations propose broad frameworks after understanding major global issues, but they rarely reflect individual countries' positions. Saying that Germany and Korea have good fiscal conditions and should spend more is either ignorance or a statement made for the sake of a bigger picture. Korea's fiscal deficit-to-GDP ratio is rising rapidly. With aging increasing welfare spending, the long-term fiscal outlook worsens. Following international organizations' advice to spend more is problematic. Thinking about the nation's future and future generations is our responsibility, not theirs. The important hidden message in international organizations' policy advice is that Korea must improve productivity through deregulation and labor reform. This is the real message we should heed.

Jeon Gwang-woo, Chairman of the World Economy Research Institute, is being interviewed by Asia Economy. / Photo by Moon Ho-nam munonam@

-There are criticisms that the money spent during the COVID-19 response only fueled asset market concentration.

▲The decoupling between the real economy and financial markets has never been this wide, even compared to past crises. In Korea, young people's risky asset investments are notably severe, and it is problematic that the government and politicians view this as a positive phenomenon. Recently, President Moon Jae-in said, "Donghak Ants (retail investors) supported the stock market," but making such comments at a time when decoupling risks appear requires caution. When the economy recovers, liquidity will be absorbed, and corrections may occur, which could raise accountability issues.

-Housing sale prices and jeonse (long-term deposit lease) prices are also serious problems.

▲I hope the government recognizes fundamental issues like supply and demand. The idea of manipulating market prices to adjust them is wrong. Although market mechanisms are not perfect, rising prices clearly indicate demand. The government should first consider market mechanisms by increasing supply and then make fine adjustments or regulations. Starting with regulations causes balloon effects.

"We Must Grow Companies First to Solve Marriage and Birthrate Issues"

-Accumulated private debt is also a problem. Is there a need to early liquidate zombie companies that have increased since COVID-19, which could shake the financial system?

▲It is a difficult issue. Even after the financial crisis, it was hard to distinguish 'sustainable companies' during ongoing crises. While selecting and supporting companies is important, restoring overall economic vitality is the shortcut to restoring zombie companies' self-sustainability. Financial support is not the only way. Considering Korea's unique industrial structure, large corporations and subcontractors are linked, so large corporations must recover for others to survive. This is why the approach that 'all large corporations are bad' is wrong. Providing corporate support and easing regulations to help the economy run properly may be more necessary than financial support. Examples include the 52-hour workweek system and supplementing the Fair Economy 3 Laws.

-The government says it will foster new industries through the 'Korean New Deal' and channel liquidity into productive areas.

▲The post-COVID era is an era of competing with digital and advanced technology. Regardless of the name 'New Deal' used for infrastructure investment in the 1930s, the idea that the government leads policy is very outdated. Although there are many smart government officials, they cannot surpass private companies in their fields. The key is to enable core companies to thrive while creating a structure where small and medium enterprises are not weakened. Win-win cooperation is not about holding back large corporations to make them similar. Jobs must be created in private companies and innovative industries. Public jobs have increased significantly under the current government, but these are not something to boast about; they are a shameful tax burden. Overseas investors are not attracted to countries that create public sector jobs.

-Low birthrate is concerning as it lowers Korea's potential growth rate.

▲Among capital, labor, and total factor productivity that make up potential growth, labor is very important. Let's divide labor into quantity (increase in working-age population) and quality (labor reform). While subsidies help birthrates, they are not a fundamental solution. Without solving job and housing problems and with an uncertain future, people will not marry or have children. The best low birthrate policy is to present a vision for the national economic future. Regarding labor quality, creating an environment with appropriate incentives to increase productivity seems to be the answer. This does not mean forcing layoffs but providing sufficient incentives to improve efficiency. Companies competing with global firms should not operate like public institutions.

-Disaster relief funds and basic income are hot issues. Due to K-shaped recovery, it is difficult to eliminate support for vulnerable groups.

▲I believe support should be selectively targeted. According to Esther Duflo, MIT professor, the most important factor in deciding universal or selective support is whether the country has the statistics to implement selective support. Korea has sufficient infrastructure, so support should not be distributed universally just because it is politically or administratively convenient. The idea of raising taxes because there are more spending needs is dangerous. The basic tax principle is to broaden the tax base and lower rates, but now it is going the opposite way. Instead of discussing tax increases, the most important thing is to consider ways to stimulate the economy without spending much money.

Jeon Gwang-woo, Chairman of the World Economy Research Institute, is being interviewed by Asia Economy. In Chairman Jeon's office, there are photos of him with Larry Fink, Chairman of BlackRock, Jamie Dimon, Chairman of JP Morgan, and Ben Bernanke, former Chairman of the U.S. Federal Reserve (Fed). Photo by Moon Ho-nam munonam@

"Global Economy Will Recover but Uncertainty Remains... K-shaped Recovery Will Coexist"

-Many expect the global economy to improve compared to last year. What are the timing and positive/negative factors for recovery?

▲The positive factor is undoubtedly the COVID-19 vaccine effect. If vaccinations proceed actively in the first half, a full recovery will likely appear in the second half. The U.S. continuing stimulus measures also improves macro indicators. However, vaccine access varies by country, and unfortunately, we are on the latter side, so the gap could be large. The resurgence of COVID-19 and variants are downside risks. The global economic recovery will likely take the form of a 'K-shaped recovery' with coexistence of different trajectories by country, industry, income, and class.

-What is the biggest variable?

▲There is an emerging market risk arising from the K-shaped recovery. There are two types: first, countries facing default risk due to severe COVID-19 shocks (India, Latin American countries); second, countries burdened with unsustainable debt, such as Zambia, Sri Lanka, and Pakistan, which borrowed funds through China's Belt and Road Initiative (land and maritime Silk Road).

-What about export prospects after the Biden administration and the position our government should take?

▲Export prospects do not seem to worsen. Although there are concerns about won appreciation, there is hope that a minimum resistance level will be maintained. We should adapt well to the Biden administration's free trade and multilateralism. We might join not only the China-led Regional Comprehensive Economic Partnership (RCEP) but also the U.S.-led Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

-It seems we have no choice but to be cautious.

▲I think we should act according to our principles rather than tightrope walking. It is not a matter of choice. Security must come first for our economy to exist. As a member of the Free Alliance, prioritizing security and adhering to the international order of free trade is a major issue. Being confident about this earns more respect. We also need to voice our position properly in relations with China. We should not only participate actively but also remember that we hold an important position in Northeast Asia.

Jeon Gwang-woo, Chairman of the Institute for Global Economics, Has Acted as Korea’s Economic Savior in Every Crisis Jeon Gwang-woo, Chairman of the Institute for Global Economics (IGE) and former Chairman of the Financial Services Commission, is an economic expert with extensive experience in the global economy, Korean economy, and academia. He graduated from Seoul National University’s Department of Economics and Indiana University’s Business School in the U.S., then joined Michigan State University as a professor in 1982. From 1986 to 1998, he worked at the World Bank as a senior economist and head of the international finance team. He also served as director of the International Finance Center in 2000, gaining diverse experience. Domestically, he was appointed across various administrations regardless of political orientation. When the IMF foreign exchange crisis broke out in 1998, he returned to Korea at the invitation of the Kim Young-sam administration and served as Deputy Prime Minister and Special Advisor to the Minister of Finance and Economy during the early Kim Dae-jung administration. Under the Roh Moo-hyun administration, he worked as Ambassador for International Finance at the Ministry of Foreign Affairs and Trade. In 2008, the first year of the Lee Myung-bak administration, he served as the inaugural Chairman of the Financial Services Commission and was Chairman of the National Pension Service from late 2009 to 2013. Since 2019, he has served as Chairman of IGE, founded by former Finance Minister Sa Gong-il, organizing various forums and conferences. Chairman Jeon said, "Despite the COVID-19 crisis, we actively continued meetings using online platforms," and "This year, my goal is to exchange with global leaders in international, economic, political, and diplomatic security fields and provide useful information to Korean companies and the government."