On Thursday I was invited by the Economics Department at Stellenbosch University to come discuss my controversial article in Daily Maverick on macro-economic policy (see link below).
Needless to say, they did not agree with my critique of ‘expansionary contraction’ (i.e. austerity) and conservative monetary policy. I summed up the consequences of their position as follows: a well-managed retarded collapse, that in the end triggers a massive deficit as the government spends more to stave off a revolution. Come on, when push comes to shove, do you honestly think an ANC Government would choose a low deficit before a revolution? Oh yes, I forgot – maybe it is assumed that the revolution can be headed off my repressing it with force. Is that good for growth? Well, it can be – after all, Pinochet pulled it off. (Maybe that is what was meant by countering the ‘threat of populist demands’. Well, not by intent, but that would be the consequence.) But in today’s world? Really? I doubt it. But then I got sent this article from the FT on South Korea’s expansionary fiscal policy. Worth considering. Never thought I would see the FT punting support for economic heterodoxy.
South Korea’s fiscal boost is a model for others
How should an export-driven economy with a strong attachment to fiscal discipline, an ageing population and a bitter dispute with an island trading partner react when it is under economic pressure? As regional industrial powerhouses, South Korea and Germany both face similar challenges from the tensions in the global trading system: growth has collapsed, inflation is well below target and monetary policy has already done what it can.
Yet there is one important difference. Despite ample space for easing in both countries, only South Korea has broken with orthodoxy and delivered a radically expansionary budget to boost its flagging economy. Germany, which is set to make a big announcement on how to tackle climate change this Friday, might take note of the speed with which South Korean leaders have been able to adapt to new economic realities.
Seoul’s longstanding commitment to fiscal discipline could put even Berlin to shame. The overall budget for South Korea has been in surplus for more than 20 years. Loosening during the financial crisis was not large enough to tip the government into the red. No other major economy has such a lengthy record of
prudence. Though Germany has been consistently in the black since 2014, its deficit exceeded 3 per cent of national income in seven out of the 10 years from 2001 to 2010.
Now both countries face similar problems. German industry specialises in automobiles, South Korea’s in smartphones and semiconductors. Both these sectors face structural shifts as drivers look to electric cars and phone users fail to find newer models such a draw. The two countries are likewise both at the sharp end of the trade war between the US and China, as well as more localised disputes with Japan in the case of South Korea and the turmoil over Brexit for Germany. They may avoid a recession, but both countries are certainly heading for a
slowdown. Low consumer confidence and falling investment have prompted economists to forecast the slowest rate of growth in South Korea for a decade. Germany, meanwhile, is expected to register its most sluggish pace of expansion for six years because of falling export orders and a construction sector that is
stagnating. In response to the deteriorating economic outlook, Germany has begun to flirt with a more expansionary stance but is yet to commit. Last week, finance minister Olaf Scholz said that if an economic crisis breaks out “thanks to our sound finances we will be able to counter it with many, many billions”. Yet the planned 1 per cent increase in spending still appears lacklustre compared with the action taken elsewhere. In Seoul, fiscal conservatism has come to a decisive end. South Korea has planned increases related to job creation, welfare payments and research and development. Spending is being increased by 8 per cent — on top of a supplementary budget passed in August — despite sluggish tax receipts. This South Korea’s fiscal boost is a model for others means government borrowing is expected to reach a record high. An overall deficit next year, which includes the social security fund, would mark a big shift from a 2018 surplus of 2.8 per cent of national income.Fiscal easing will take longer to transmit to the real economy than monetary policy, but that does not make it any less important. The effects on business and consumer confidence may be meaningful as companies look to a new source of orders. Expectations for inflation and economic growth could improve. South Korea is right to act swiftly before the outlook deteriorates further. The global backdrop has changed: Berlin can learn from Seoul’s willingness to change, too.