[Diagnosis and Prescription] Korea’s Low-Growth Economy: Problems, Causes, and Solutions

Contents

I. Statement of the Problem

II. The Reality of Low Growth and the Problems Caused by Low Growth

1. The Reality of Low Growth

2. Problems Caused by Low Growth

III. Causes of the Low-Growth Problem

1. Causes of Economic Growth

2. Causes of Low Growth

(1) Introduction

(2) Inflation

(3) Business Fluctuations

(4) Price Controls: The Case of Price Floors

(5) Price Controls: The Case of Price Ceilings

(6) Labor Unions

(7) Fiscal Deficits

(8) Unwise Fiscal Spending

(9) Wrongdoing, Corruption, and Political Funds

3. Similar Theories of Economic Growth

IV. Solutions to the Low-Growth Problem

(1) Solution 1: From the Causes of Growth

(2) Solution 2: From the Causes of Low Growth

(3) Synthesis

References

I. Statement of the Problem

President Moon Jae-in and his economic aides recently (February 2019) made it clear that they had no intention of abandoning the minimum wage system, the core of the income-led growth policy, despite many experts’ pointing out that it had failed. In the early period when criticism first emerged that the minimum wage system had failed, there was also frequent discussion of the criticism that “the left has no theory of (economic) growth.”

One might suppose that the purpose of the left, despite lacking a growth theory, in implementing the minimum wage system was to alleviate income inequality. However, the minimum wage system cannot alleviate income inequality either. It is a policy highly likely to worsen income inequality.

Only when economic growth occurs and jobs are created as a result can income inequality be alleviated to some degree. Then what causes or policies bring about economic growth? As noted above, the left has no theory capable of inducing or promoting economic growth. On the other hand, the field of economics has the neoclassical synthesis theory of economic growth and “endogenous growth theory,” which emphasizes technological progress and knowledge, among others. Although they cannot be discussed in detail here, these theories clearly have problems.

To find solutions, one must understand the causes of low growth—including negative growth—or sluggish economic growth. The problem, paradoxically, is that in order to investigate the causes of low growth, it is first necessary to identify accurately the causes of economic growth. This is because low growth and economic growth are like two sides of the same coin. This point is discussed in detail below. Accordingly, I will first explain the Austrian School’s theory of economic growth or economic development. Austrian economics does not present an independent theoretical system specifically for economic growth or economic development. In terms of growth theory, this distinguishes it from the modern mainstream theories such as the neoclassical synthesis theory of growth and endogenous growth theory.

Scholars who subscribe to Austrian economics argue that “voluntary exchange” guarantees individuals the best opportunities to maximize their welfare. They point out, however, that for such voluntary exchange to take place, a social framework—such as “protection of private property, freedom of contract, and sound money”—must be in place. In other words, within those three social frameworks, individuals do their best to achieve their own ends, and therefore only voluntary exchange maximizes individual welfare. At that point, the magnitude of economic growth is determined. Thus, unlike other economists, Austrian economists focus their research on the three kinds of social framework that guarantee voluntary exchange. For that very reason, Austrian economists pursue a broader approach to economic growth than other theories do, namely a “comparative institutions approach.”

Within a given social framework, individuals maximize their welfare through voluntary exchange. Regardless of time, place, sex, or age, this is an immutable truth. As a result, as noted above, economists who subscribe to Austrian economics are interested in the comparative institutions approach. And by welfare, one means both goods that can be exchanged in the market (for example, automobiles) and goods that cannot be exchanged in the market (for example, receiving “recognition” from others). Therefore, when Austrian economists speak of maximizing welfare, welfare includes both exchangeable and non-exchangeable goods. In this paper, however, we assume the maximization of non-exchangeable goods to be constant and define economic growth as people’s maximizing exchangeable goods.

Nevertheless, from the economic theory presented by Austrian economics, one can identify the factors that bring about economic growth and the factors that hinder it. Below, I will point out only the important factors among these two categories. The discussion will proceed on the assumption that all other conditions remain constant.

There are also quite a few similar theories of economic growth in circulation. These include the “middle-income trap,” “potential growth rate,” “mature economy,” and “shared growth.” These should be classified as theories of economic growth in that they subtly contain propositions related to economic growth, but because their content is wrong, they should be called false theories of economic growth. Below, I will briefly criticize these four similar theories of economic growth.

In reality, there exists not only “normal” economic growth but also “compulsory growth.” Normal economic growth means economic growth that results when economic agents engage in voluntary exchange within the three social frameworks. Compulsory growth means growth driven by government subsidies. Compulsory growth must be distinguished from economic growth arising from voluntary action. Rothbard (1993, as cited on p. 834) explains the point as follows: “But if the government forces growth, then only some grow, at the expense of the retrogression of others.” This is not “social” growth. Compulsory growth does not benefit society as a whole as much as freely chosen economic growth does. Compared with normal economic growth, compulsory growth makes income more unequal, even though, as with normal economic growth, all economic agents enjoy the fruits of growth. Here, the fruits of growth mean increased income, higher-quality goods, various kinds of goods, and so on.

During the Park Chung Hee era, when the government led economic growth while providing substantial subsidies, compulsory growth accounted for a considerable share of total growth. One might argue, however, that at the present time, when the problem of low growth is being raised, compulsory growth no longer exists. But that claim is incorrect. For example, the current won/dollar exchange rate is, to some extent, higher than the free-market exchange rate. As a result, despite the floating exchange rate system, trade surpluses have continued for a long time. There are two reasons for this. One is that private economic agents voluntarily hold dollars, and the other is that the government intervenes in the foreign exchange market and manipulates the exchange rate for exporting firms. The latter is a subsidy the government gives to exporters. In addition, the government pays various kinds of subsidies under the pretext of promoting exports or job creation, although it is true that such subsidies are far smaller than those of the Third Republic era. Consider another example. The minimum wage system is a policy intended to generate economic growth by forcibly raising the wages of non-regular workers. In that the government, by law, compels subsidies for some non-regular workers, if economic growth were to occur, it would clearly be compulsory growth. Unfortunately, however, the minimum wage system cannot generate economic growth. It is true that, compared with the Third Republic era, the share of compulsory growth in economic growth is much lower today. But it has not disappeared. Nevertheless, the discussion below does not deal with compulsory growth.

* For the full text, see the attached PDF file.

Wiki:

https://www.cfe.org/w/bbsDetail.php?&idx=29

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Original title: [진단과 처방]저성장의 한국경제: 문제, 원인 그리고 해법

Author: Yong-deok Jeon

Date: 2019-03-27

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=report&pn=3&idx=20048