Populism Brings Fresh Risks for Economy

      January 03, 2022 15:09

      Korea's economy faces huge challenges this year, from the coronavirus prolonged coronavirus pandemic to stagnation. First of all, it is uncertain if the pandemic is really ending. If it drags on until the end of this year, sluggish consumption and production could drive Korea into a sump of low growth. The government targets 3.1 percent growth this year, but private research institutes forecast only growth in the mid two percent.

      Another risk is inflation. There is a possibility of consumer prices rising even more this year after increasing at the highest rate in a decade in 2021. Excess global liquidity stemming from quantitative easing programs around the world to cushion the impact of the coronavirus pandemic plus surging raw material prices and global supply chain disruptions amid mounting U.S.-China tensions could fuel inflationary pressure. Fiscal austerity in the U.S. is like a ticking time bomb for Korea, which has seen household debt surge to a record. Sharp increases in interest rates could strain the millions of households that took out loans and cause the real estate and asset bubbles to pop.

      But the ultimate danger is posed by political liabilities. Presidential hopefuls are trying to outdo each other with populist economic policies. Both the ruling and opposition parties are pledging tens of trillions of won in handouts without thoroughly weighing the fiscal impact (US$1=W1,189). Boosting fiscal spending at a time when consumer prices are going through the roof is like pouring fire on gasoline. We could end up in uncharted territory if fiscal debt, which already amounts to W100 quadrillion won, continues to soar.

      The government must maintain sanity at a time when political fervor is straining the economy. It is the responsibility of the Moon Jae-in administration to retain fiscal health until its term ends in early May even if presidential candidates are making pledges to shower cash on voters. Is that really too much to ask of a president who has nothing more to lose?

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