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[Editorial] Back to basics

Facility investment falls 5 straight months; policy shift needed to revive virtuous circle

Corporate facility investment decreased for the fifth straight month in July, according to data released by Statistics Korea last week.

It is the first time since the 1997-1998 Korean financial crisis that Korea has had such an extended decrease. Facility investment fell 10 months in a row from September 1997, two months before Korea sought a bailout from the International Monetary Fund.

Both industrial production and retail sales inched up 0.5 percent from a month earlier.

An index showing the present business environment worsened for four successive months, while one projecting future business conditions fell below the baseline of 100 for the first time in 23 months.

These are symptoms showing that Korea is on the brink of an economic downturn.

What is worrisome is an increasing number of small and mid-sized companies on sale due to a worsening management environment.

The number of small and venture businesses put up for sale on Korea M&A Exchange increased 44 percent to 360 in the first half from the same period of last year.

A slowdown in manufacturing and an increase in labor costs are among the major reasons why they have been put on sale. Not a few people have reportedly given up on their businesses because of heavy inheritance and gift taxes.

Self-employed business owners hit hard by a drastic minimum wage hike are as desperate. The number of self-employed people who closed their businesses is expected to rise from 900,000 last year to over 1 million this year.

In this situation, regulations limiting corporate investment die hard.

President Moon Jae-in pushed to ease restrictions on non-financial companies’ investment in internet-only banks, but the related bill has been stalled by none other than some members of the ruling party. This raises concern that his drive for deregulation to spur innovation may lose momentum.

Innovation and deregulation are needed for growth in the fourth industrial revolution, but they will hardly blossom unless the business environment improves.

Reflecting the tough economic conditions, the Monetary Policy Board of the Bank of Korea froze its benchmark interest rate last week for the ninth straight month. The US Fed is reportedly expected to raise its interest rate more than once by the end of the year. If that happens the gap between policy rates of the two countries will likely widen further from the current 0.5 percentage points. However, it is not easy to raise the rate to prevent an outflow of funds, due to the possibility that it could cause a sharp economic contraction.

Once the economy shifts into a downturn, the number of low-income jobs will decrease faster and income inequality will deepen.

With little room to deploy monetary policies such as raising interest rates, the government is pinning its hopes on fiscal stimulus. It has drawn up a 470.5 trillion won ($402 billion) “super” budget for next year.

It spent 54 trillion won on job creation for two years, but employment conditions have not improved. Still, the government holds fast to its plans for fiscal expansion.

Jobs cannot be sustained by tax. Tax has limits in reviving the economy.

Kim Kwang-doo, vice chairman of the National Economic Advisory Council, met with Moon on Thursday and is said to have given him an advice not to bury himself in controversies over the income-led growth policy. He advised Moon to “go back to basics.”

Such advice merits attention.

He had warned in May that the Korean economy was getting closer to recession. But the government did not listen.

Even after job creation fell to just 5,000 jobs and income inequality hit its worst level in 10 years, Cheong Wa Dae said that its “economic policy is in the right direction.”

Only when companies invest can production and sales increase, along with employees’ income and consumption. Companies will then afford more investment to increase output. This is a virtuous circle.

The basics of an economy lie in markets and companies. Job creation and economic recovery must be led by companies.

All the government has to do is to foster the market mechanism and corporate investment. It is time to go back to basics.