'MBnomics' Under Stress as Oil Prices Soar

    May 29, 2008 09:32

    President Lee Myung-bak’s growth-focused macroeconomic policies are coming under pressure from soaring oil prices. Nicknamed MBnomics, Lee’s macroeconomic policy aims to boost exports by capitalizing on a high won-dollar exchange rate and to stimulate investment and domestic consumption through more government spending and a cut in interest rates. These are meant to achieve the goal of creating more jobs.

    But skyrocketing international oil prices are getting in the way, and the government’s policy to keep the won low is increasing inflationary pressure further. Critics say the foreign exchange policy is simply wrong. Experts warn that if the situation goes unchecked, Korea will likely suffer stagflation -- where commodity prices go up while the economy struggles -- and urge a policy mix suitable for the age of super-high oil prices.


    The bull statue in front of the Korea Securities Dealers Association in Yeouido, Seoul


    The government’s economic team has pushed to keep the won low to offset sluggish domestic consumption with exports. As a result, the dollar jumped 12 percent compared to late last year. But just when the won tumbled, international oil prices climbed, which together sent prices of imported goods up, and with them those of commodity prices. Imported goods were up by 31.3 percent in April compared to the same period last year. Last year, a lower won-dollar rate cushioned the pressure of rising imported product prices, but since December, the high exchange rate has increased inflationary pressure, and the growth has led to a rise in producer and consumer prices.

    Since their inauguration, President Lee and his government have stuck to a goal of achieving 6 percent economic growth through fiscal and monetary policies. There is evidence for President Lee’s obsession with growth: the appropriation of additional budgets to boost domestic consumption; various tax reduction promises; and insistence on lowering interest rates. But with high oil prices, any dogmatic attempt to reinvigorate the economy could hurt the economy as a whole and eat into mid- and long-term growth potential. During the first and second oil shocks, the U.S. and U.K. increased government spending and cut interest rates to circulate excessive cash in the market, producing stagflation.

    A Cheong Wa Dae official on Wednesday said the government will get busy reining in inflation to cope with high oil prices and implement economic policies with the aim to stabilize product prices. However, the Ministry of Strategy and Finance differs. Cheong Wa Dae says the current exchange rate is quite high, considering soaring oil prices and a weak U.S. dollar, saying a lower won-dollar rate will help the Korean economy absorb the shock from skyrocketing international oil prices. But the ministry takes the opposite position, saying the current foreign exchange rate is determined by demand and supply, and is therefore normal and helps exports. In short, it is reluctant to give up on the low won, which it considers the single means to pull growth up when domestic consumption is dull.

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