The Korea Herald


[Editorial] Growth and prices

By 최남현

Published : Jan. 26, 2011 - 17:30

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Economics textbooks say the market price of a good is determined by its supply and the demand for it. But demand and supply are not the only determinants in Korea. Not mentioned in the textbooks is the brute power of the Korean government, which can also influence prices.

According to a weekly survey conducted on Jan. 7, 48 of the 79 daily necessitates gained and 29 declined in price. There was no change in price for the remaining two items. A week later, however, gainers were outnumbered by decliners 28 to 51.

Few would dispute that the reversal was the work of the government, which declared an all-out war on prices at the outset of this year. But whether or not the prices will remain tamed is open to question, to say the least.

Inflationary pressure was destined to rise because the government made little effort to siphon off excess liquidity when the Korean economy successfully pulled itself out of the global financial crisis. Instead, its economic policy continued to focus on generating growth, not stabilizing prices.

When inflation started to raise its ugly head, the government drew all economic agencies into a war on prices. They included such unlikely agencies as the Fair Trade Commission and the National Tax Service.

A fight against inflation is beyond the purview of the Fair Trade Commission and the National Tax Service. Nonetheless, they are still capable of twisting anyone’s arm if he refuses to toe the line. What business concern could remain unruffled when threatened with a tax audit or an investigation into alleged price-fixing?

On his inauguration as chairman of the Fair Trade Commission earlier this month, Kim Dong-soo declared his antitrust commission would be at the forefront of the battle against inflation. But nowhere in the relevant law can be found a clause authorizing the commission to help stabilize prices. The nearest it can get is the use of power against unfair trade, including price fixing.

As such, the commission was criticized for abusing its power when it started to put pressure on refineries to lower the prices of gasoline and other petroleum products. The cue to action came from President Lee Myung-bak, who said earlier in the month, “Oil prices are puzzling.”

On hearing the remark, officials of the Fair Trade Commission stormed into offices of the refineries and hauled off documents containing information on price setting. Of course, it said it was doing so as part of its investigation into price-fixing allegations.

President Lee is aiming at generating growth at a rate of 5 percent or higher and capping inflation at 3 percent this year, as he told business leaders when he was hosting lunch for them at the Blue House on Monday. But it will be extremely difficult, if not impossible, to attain both goals.

Actually, the Bank of Korea, which forecast 4.5 percent expansion at the outset of this year, is working on an upward revision of the 2011 growth outlook. Its governor said lat week, “We suspect the economy will perform better than we anticipated.”

Now the problem is an increase in prices. The governor said the central bank was much more concerned about inflationary pressure, which is set to accelerate as the economy grows at a faster pace. If so, he may not be able to make good on his promise to keep this year’s rate of inflation at 3.5 percent or lower.

What the central bank needs to do now is turn the spigot on easy credit for growth at a slower pace. If actual growth is allowed to outpace the growth potential, it may reach breaking point. The central bank should know better than to believe that the government agencies will be able to hold down inflationary pressure for long.