[Opinion] How to Increase the Lagging Perceived Growth Rate

Jaebin An, Professor at the Graduate School of International Studies, Seoul National University

According to the preliminary estimate of the first quarter GDP announced last week, South Korea's economy grew by 1.6% quarter-on-quarter, restoring its economic scale to the pre-COVID-19 crisis level. The fact that growth exceeded market consensus for two consecutive quarters following the fourth quarter of last year can be interpreted as evidence of the rapid pace of economic recovery. It is also encouraging that South Korea was among the first major advanced countries to recover from the COVID shock. Unless there are major unexpected events, achieving growth in the mid-to-high 3% range, as initially mentioned by the government, seems possible. However, despite recording a growth rate far exceeding expectations amid continued strengthened social distancing due to the resurgence of COVID-19, this good news did not resonate with the public, who were anxious due to the slow pace of vaccine distribution.

Looking at the growth rate in the first quarter of this year, the increase in overseas export demand due to vaccine distribution and the expansion of facility investment resulting from reduced uncertainty played a significant role. Private consumption turned positive, and the government sector also contributed to growth, showing that all economic agents?households, businesses, and government?contributed to the rapid recovery of indicators. However, private consumption still has not recovered to the pre-COVID crisis level.

By industry, manufacturing mainly drove growth, while the recovery in the service sector has been slow. The reason most people did not pay much attention to related news is that the perceived growth rate is significantly disconnected from the overall growth rate. There is concern that, for the time being, the economic growth rate will remain just a number to many people, an unfortunate situation.

Policy authorities must prioritize achieving the target growth rate while also increasing the perceived growth rate. The constraint is that the monetary authorities have no other option but to maintain the current expansionary monetary policy stance. At a time when large-scale economic stimulus measures and the smoother-than-expected vaccine supply situation are amplifying inflation concerns originating from the U.S., implementing additional monetary easing could be a self-defeating move.

Ultimately, the ball is in the fiscal authorities' court. Considering the rapidly increasing government debt, expanding fiscal spending is not the only solution. The U.S. government is already considering corporate tax and wealth tax increases to offset fiscal deficits. With the presidential election next year, it will be difficult for South Korea to introduce tax hikes. A responsible attitude from fiscal authorities to maximize the efficiency of government spending is more necessary than ever.

Through high-intensity structural adjustments in government spending, it is essential to actively utilize and reallocate items with low priority or expected non-use to sectors with high feasibility or urgency. As the COVID-19 crisis prolongs, alleviating the damage to vulnerable groups, which continues to accumulate, is much more important and has a greater economic ripple effect than replacing perfectly fine sidewalks as the year-end approaches.

Last year, agencies already secured about 10 trillion won in supplementary budget resources through painful spending structural adjustments. This year, it is hoped that fiscal authorities, as a strong control tower, will overcome departmental and regional selfishness and achieve bold spending structural adjustments. Fiscal policy should focus not on 'how much' is spent but on 'how' it is spent. This is the most effective policy to achieve the target growth rate, minimize damage to vulnerable groups, and slow the increase in government debt.

Ahn Jae-bin, Professor, Graduate School of International Studies, Seoul National University