[Opinion] Success Conditions of the Yoon Government's Economic Policy

Increase Public Opinion Gathering and Support
Exchange Rate and External Economic Stability Are Also Important
Set Core Policy Directions and Present Long-Term Vision

It has been 100 days since the Yoon Seok-yeol administration took office. During the past 100 days, the economic team established plans to achieve leapfrogging and growth through private sector-led economic policies, advanced science and technology innovation, and fostering future industries. Additionally, to stabilize housing prices, the paradigm shifted from demand suppression to supply expansion, and related tax systems were changed from the existing housing unit standards to the total value of owned houses to enhance tax fairness. Viewed this way, the policy direction of the Yoon administration can be considered appropriate. However, there are many points that need to be supplemented for these policies to yield results.

First, it is necessary to increase public support. All policies are related to laws and systems decided by the National Assembly. In the current situation of a divided legislature with a minority ruling party, institutional changes are difficult without strong public support. Therefore, policy authorities need to strengthen publicity and actively gather public opinions on related policies to raise public support. Another reason public support is needed is due to opposition from interest groups. Institutional reforms are expected to face strong resistance from interest groups that have benefited under the existing system. Professor Daron Acemoglu of MIT emphasized in his book "Why Nations Fail" that if a country cannot overcome the opposition of interest groups, it will fail in institutional reform and ultimately be unable to grow. The new government's reforms and restructuring in pensions, education, and other areas are likely to face strong opposition from interest groups. The Yoon administration's economic team must increase public support to promote structural reforms and enhance the performance of economic policies.

Stability in the external economic sector is also important. To actively implement domestic economic policies, stability in the external economic sector such as trade balance or current account surplus and exchange rate stability is necessary. When the external economy is unstable, it is difficult to use tight monetary and fiscal policies to stabilize prices or real estate prices. If the economic downturn causes a large drop in asset prices, capital outflows could lead to a foreign exchange crisis. Structural reforms would also be difficult to succeed. When the trade balance is in deficit, external credibility declines, and combined with corporate insolvency, capital outflows are likely to worsen. Therefore, a trade surplus is essential when using structural reforms or tight policies. Even in the previous administration, despite increasing fiscal deficits and national debt and the creation of a real estate bubble, concerns about capital outflows were absent due to the Korea-US currency swap and trade surplus stabilizing the external sector. In the current situation, where the external sector is unstable and the exchange rate has risen to the 1,300 won level, it is difficult to sustain structural reforms or tight monetary policies for price stabilization. Therefore, the economic team needs to prioritize policies that stabilize the external economic sector before structural reforms.

Lastly, a long-term vision must be presented. Even if structural reforms increase unemployment and provoke strong opposition from interest groups, the public will support policies if there is hope for the future. For this reason, past administrations have all used core policy directions such as creative economy and income-led growth. The Yoon administration also presents a long-term vision with private sector-led economic policies, fair economy, freedom, advanced science and technology innovation, and fostering future industries. However, rather than having too many policy goals, it is necessary to present a long-term vision by setting core policy directions such as new industrial economy or new industrial growth that can easily resonate with the public.

The Korean economy was feared to experience a 20-year economic downturn like Japan by transferring existing key industries such as shipbuilding, steel, electronics, and automobiles to China. However, recently, uncertain new industries have become visible in semiconductors, batteries and electric vehicles, bio, and aerospace and defense industries, providing the Korean economy with an opportunity to leap forward as a new industrial economy. Under the difficult conditions of a divided legislature, the Yoon administration's economic team must establish concrete plans and set core policy directions to increase public support and achieve results in structural reforms and economic policies.

Kim Jeong-sik, Professor Emeritus, Department of Economics, Yonsei University