[BOK Focus] "It's Still Time for Growth Over Distribution," Says BOK Governor Quoting Mentor

'Advisor' Summers, Former US Treasury Secretary, Consulted for Advice on Tackling 'Populist Policies'
Growing Concerns Recently Over Declining Potential Growth Rate

"I believe our society is moving in a direction that emphasizes equality and fairness more than efficiency. Whether that is right or wrong, I think it has imposed many constraints on our policy decisions, especially during the COVID-19 period. Many countries fundamentally rely on lump sum transfers and economically populist policies. It is really difficult to revert this trend toward emphasizing efficiency."

This is the concern recently expressed by Lee Chang-yong, Governor of the Bank of Korea, during a conversation with his 'mentor,' Professor Lawrence Summers of Harvard University (former U.S. Treasury Secretary). On the 6th, at the Seoul Forum co-hosted by the World Bank (WB) held at the Bank of Korea Conference Hall, Lee mentioned this issue as his final question in a video dialogue lasting about an hour with Professor Summers, asking for guidance on how policymakers worldwide should respond.

Professor Summers is a scholar whom Governor Lee respects deeply, to the extent that Lee repeatedly emphasizes that "a five-minute conversation is more insightful than reading 100 books." After graduating from Seoul National University’s Department of Economics, Lee went to Harvard University in the U.S. to pursue his doctorate, where Summers was his advisor. Lee is considered a prot?g? of Summers, and their relationship is very close.

On that day, after hearing Governor Lee’s question, Professor Summers said, "What is truly important for humanity’s future is whether more societies can enjoy the remarkable changes Korea has achieved since 1960," adding, "Macroeconomists should not forget that to reach the destination, one must take the faster escalator rather than the slower one." Korea’s per capita income, which barely exceeded $60 after the Korean War, surpassed $10,000 in 50 years, a feat called the 'Miracle on the Han River.' This comment suggests that our society is still in the phase of strengthening the 'muscles' necessary for such growth.

Governor Lee, having received this advice, responded, "I will keep this in mind while serving as the central bank governor." This is interpreted as Lee himself expressing, through the words of a distinguished scholar, that Korea still needs to build its growth capacity. A Bank of Korea official said, "Simply put, it sounds like an emphasis that now is the time to prioritize growth, which values economic efficiency, over distribution." Especially, the estimated potential growth rate of Korea (the maximum growth rate achievable without side effects by fully utilizing all production factors such as labor and capital) expected to be announced by the Bank of Korea early next year is predicted to fall to the 1% range, which is one of Governor Lee’s current major concerns, supporting this interpretation.

Governor Lee continues to send the message that although pessimistic views predict a low-growth era due to aging and low birth rates, we should not accept this passively but escape it through structural reforms. Having consistently emphasized structural reform, Lee said at a press conference held last month in Marrakesh, Morocco, "Through reforms such as labor market reform, knowledge enhancement, promotion of competition, and utilization of women and foreign workers, we want to set the potential growth rate target above 2%. That is how we will develop." In the dialogue with Professor Summers, he reiterated that fundamental growth 'muscles' must be developed through structural reforms rather than temporary 'pumping' effects via monetary and fiscal policies.

Moreover, the increased fiscal spending to respond to the economic downturn during the COVID-19 crisis has become a factor driving up prices, making it difficult for the Bank of Korea governor to conduct monetary policy. To stabilize rising prices, the Bank of Korea raised the base interest rate from as low as 0.5% to 3.5% over ten hikes, but inflation remains stubborn. Professor Seok Byung-hoon of Ewha Womans University’s Department of Economics explained, "To secure the effectiveness of monetary policy, national debt should not increase further, but there are voices everywhere calling for increased fiscal spending to stimulate the economy. It seems Governor Lee sincerely implies that we need to find other driving forces." He added, "Fiscal spending increased during the pandemic needs to be normalized, but it is practically very difficult to reduce the proportion of mandatory spending once increased, so I think he pointed this out as well."

Professor Heo Jun-young of Sogang University’s Department of Economics also said, "For a country like Korea, which is highly open to the outside world, the global consensus is that spending more money and printing more in a poor global economic situation only slightly raises the growth rate in the short term," adding, "Currently, monetary policy is tightening to control inflation, fiscal policy is being frugal, and the message continuously given is that structural reforms must be faithfully implemented to fundamentally change the economy’s constitution."