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[YEAR-END REVIEW(2)]Economic crisis derails `MBnomics`

President Lee Myung-bak`s economic policies received public attention because many voted for him in the presidential election hoping that he would fulfill his election promise to achieve 7 percent annual growth, $40,000 annual per capita income and create the world`s seventh-largest economy. Those were the key elements of so-called "MBnomics."
During the campaign, Lee pledged that his growth-oriented, business-friendly economic policies would boost domestic demand through tax cuts, privatization and improvement of efficiency in the public sector and deregulation aimed at making the financial industry a globally competitive sector.
Less than one year since Lee`s inauguration in February, however, many of Lee`s economic policy programs have gone adrift due to the economic slowdown, experts said.
The Finance Ministry has already revised its GDP growth forecast for 2009 several times, from a 5 percent projection in September, to 4 percent in November, to the upper 2 percent range in December.
Economists say the Finance Ministry`s ill-advised foreign exchange policy is one of the major mistakes that Lee`s economic team made this year.
They said Finance Minister Kang Man-soo had been concerned about a current account deficit because he experienced the 1997-98 Asian financial crisis as deputy finance minister.
Preoccupied with achieving a current account surplus, Kang favored a weak won which would benefit Korean exporters by making their products cheaper in the global market and improve the nation`s service account deficit.
However, the won, which fell 6 percent against the greenback in March and April alone, at the same time made import prices expensive, fueling the already high inflation caused by surging oil prices.
With the inflation rate shooting up over 5.5 percent in June and hitting 5.9 percent in July, the Finance Ministry made a U-turn with its foreign exchange policy, seeking a strong won and pumping dollars from the foreign currency reserves into the market.
Although Kang later said that he never sought to affect the value of the local currency, the financial market started to lost confidence in government policies, according to economists.
The all-out currency interventions by the Finance Ministry and the Bank of Korea have reduced the nation`s foreign reserves to $200.5 billion in November from this year`s peak of $264.2 billion in March.
Despite the aggressive currency interventions, the won plummeted to 1400.81 won to the dollar in November from an average of 929.16 won last year.
The Oct. 31 $30 billion currency swap deal between Seoul and Washington and a $100 billion bank debt guarantee from the government have calmed market jitters and brought back some stability to the local financial markets, experts said.
"President Lee`s growth-oriented policies met really bad timing," said Oh Suk-tae, an economist at Citibank Korea.
"Even though the foreign reserves decreased a lot, I think the government did everything it could."
Lee`s other key election pledge - privatization of public firms - also has hit a snag, due to strong backlash from the public who were worried about rising utility bills and other public services bills.
Lee`s reform drive lost momentum fast in the wake of the months-long candlelight vigils against the government`s decision in April to resume import of U.S. beef, analysts said.
"Lee`s economic team forfeited chances to set economic policies step by step and coordinate them one by one because of the issues like the anti-U.S. beef protests and controversies over his appointment of senior government officials," said Bae Sang-keun, an economist at the Korea Economic Research Institute.
Major public firms such as the Korea Electric Power Corp. and the Korea Gas Corp. were saved from the public sector reform.
In October, the Finance Ministry announced that it will delay the proposed merger of the Korea Credit Guarantee Fund and Kibo Technology Fund because drastic changes at the SME-funding firms could exacerbate the economic downturn.
Out of the 319 public firms, only 33 firms are to be fully sold to the private sector, according to government plans.
The privatization of the Korea Development Bank, vigorously pushed for by the Financial Services Commission in April and May, has also been delayed because of worries that the deteriorating financial market could bring down the price of the KDB too low.
Another of Lee`s visions - to turn Korea into a financial regional hub in Northeast Asia through nurturing financial firms to become giant investment banks - has encountered challenges. Experts like Korea Institute of Finance president Lee Dong-gull warned against excessive deregulation in the wake of the global financial crisis.
Experts criticized that the government has released too many economic policies too frequently this year.
"Without careful policy coordination between government agencies, they just rolled out one policy after another as if they are in competition," Bae said.
Inappropriate and uncoordinated remarks by top economic policymakers have also sparked criticism that they lack the capacity to quickly pull the ailing economy out of a slump.
While Kang said a 3 percent growth would hard to achieve next year, Bahk Byong-won, chief economic advisor to President Lee, said a 4 percent growth would be feasible at a forum last week.
Kang`s remark that people who pay comprehensive real-estate tax were strong supporters of the ruling Grand National Party was harshly criticized by both ruling and opposition parties.
FSC chairman Jun Kwang-woo`s remark on Dec. 1 that the government is considering establishing a private-sector restructuring committee was the exact opposite statement released by the FSC just one day before, which refuted a media report on FSC`s possible move to create a restructuring body.
Among other things, Lee`s economic team urgently needs to carry out a prompt restructuring in the corporate sector to win back trust from the market, Citi`s Oh said.
"For the past year, any administration would have faced great difficulties in exerting economic policies because of the unexpected economic crisis," Oh said.
"The restructuring of the corporate sector will be the litmus test for Lee`s economic team whether it can help the nation overcome the crisis."
By Kim Yoon-mi
Korea Herald Youtube