Growth and welfare
Presidential hopefuls should refrain from making irrational pledges
Angel Guria, secretary-general of the Organization for Economic Cooperation and Development (OECD), warned in Seoul last week that excessive welfare expenses will serve as a stumbling block to economic growth. He told reporters that public expenditure remained at 7.6 percent of Korea’s gross domestic product (GDP) until 2007, compared with the OECD average of 19 percent.
Yet Korea’s growth rate of public expenses surpassed 10 percent, the highest among the member countries of the Paris-based organization. Given the latest trend of welfare expansion, Korea’s outlays for public expenditure since then would be much greater.
The economic club of rich countries advised Korea to move toward ``tailored welfare,’’ rather than ``universal welfare,’’ and emphasized the need for maintaining the fiscal soundness by expanding tax revenues.
Taking into account the intensifying polarization and the widening gap between large and small companies, people’s demand for welfare is certain to climb. Nonetheless, welfare, not bolstered by growth, would be like a house of cards.
To be sure, Korea is different from other countries in that it is not endowed with natural resources. Should growth slow, the jobless would pour into the street and the country is destined to face serious consequences. We already had two nightmarish experiences ― the currency crisis in the late 1990s and the financial crisis in 2008. One good example showing how the Korean economy is fragile is that crude imports amounted to more than $100 billion last year, making up 10 percent of Korea’s annual trade volume.
The latest trend casting a sinful glance at growth is worrisome enough. People’s overall bad feelings toward the Lee Myung-bak administration stem largely from its failure to achieve high growth. If President Lee had kept his promise of achieving 7 percent economic growth and $40,000 in per capita GDP and becoming the seventh largest industrialized country under his ``747 Vision,’’ the antagonism toward the Lee administration would have waned. That is, there was a vicious cycle of low growth, polarization and plunging growth potential.
In recent years, Korea has been boiling with a controversy over universal welfare. Politicians tend to insist that welfare expenses should be expanded and that all people, regardless of their fortunes, should benefit from government welfare programs because giving benefits to as many voters as possible will help them garner votes in elections.
Does universal welfare suit Korea? Simply speaking, the universal welfare system envisions taking away resources from the poor and giving them to the rich. For larger welfare programs, the government has to collect more taxes, which would hurt growth and job creation ultimately.
Without growth, there is no welfare, especially in Korea where none but workforces exit. Politicians can rhetorically advocate balance between growth and welfare but the reality is not that simple. We have already seen negative consequences from irrational promises in such cases as school lunches and child care. What is clear is that there are no free lunches. Someone has to bear the burden in one form or another.
To expand welfare, the government needs money, which can be pooled by raising taxes or issuing bonds. If we opt to issue bonds, it would result in letting our descendants take over debt and worsening the fiscal soundness. The eurozone crisis resulted from the expansion of universal welfare without thinking about national coffers.
The key to addressing both demand for welfare and need for fiscal health lies in productive welfare and the core of productive welfare is job creation. To create jobs, growth is indispensable.
In the run-up to the Dec. 19 presidential election, presidential hopefuls will rush to unveil sugar-coated pledges to woo voters. But rash pledges would entrap politicians ultimately.