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[Editorial] ‘New Deal’ fund

Envisioned plans need to be redesigned to put them in line with market principles

The government and ruling party are preparing to create a special fund to support the South Korean version of the “New Deal” announced by President Moon Jae-in last month.

The ambitious initiative is designed to transform the country’s economy through a set of digital infrastructure and environment-friendly programs to overcome the novel coronavirus-induced shock and prepare for a post-pandemic era. It calls for spending 160 trillion won ($134 billion) by 2025 to create 1.9 million jobs.

The idea of setting up a fund to help finance the economic revival plan was first floated by Finance Minister Hong Nam-ki, who doubles as deputy prime minister for economic affairs.

In his July 30 post on Facebook, Hong said the envisioned fund would offer opportunities to make safe, profitable investments in innovative sectors that could bolster the sustainable growth of Asia’s fourth-largest economy. He also said there is a need to divert excessive amounts of liquidity from the real estate market and gold-buying to more productive activities.

The ruling Democratic Party of Korea hosted a debate last week on ways to enhance investors’ interest in the envisioned fund.

A brochure distributed during the session by an intraparty committee set up to support the New Deal initiative suggested the government would guarantee the principal and interest on all money invested in the planned fund.

Ruling party lawmakers also said measures would be worked out to ensure that the fund would achieve at least a 3 percent rate of return on investment. In addition, investors would enjoy significant tax benefits.

The envisioned fund, to a certain extent, can be expected to vitalize the local financial market, in which private investors have difficulty finding opportunities to make lucrative investments.

But there are concerns about the way the ruling party is promoting it.

The Capital Markets Act prohibits financial products from guaranteeing profits or compensation for losses. If the government seeks to bolster the rate of return on the fund above a certain level by using fiscal means, it may be breaking the law.

Given that the yields on long-term state bonds hover around 1 percent, creating a fund that virtually guarantees investors about 3 percent profit would be a far more expensive way to finance government-initiated projects. There could also be criticism that the government is trying to deflect public concerns about ballooning national debt by creating an ill-designed fund instead of issuing state bonds.

The fund needs to be redesigned in line with the market principle that investors should bear the risks of investment.

In this regard, it is important to help make New Deal projects more profitable by lifting restrictions that have been imposed on companies since Moon took office in 2017.

Such restraints have barred local entrepreneurs from entering new business areas, leaving them to lag behind innovative foreign firms in new industries that are set to lead the post-coronavirus recovery.

Moon made no mention of the need to accelerate deregulation when he unveiled the New Deal initiative. Rather, the ruling party, which has an overwhelming parliamentary majority, is pushing to enact a horde of bills to slap additional regulations on business activity.

The government should affirm its will to transform the economy in preparation for the post-pandemic era by going all out to eliminate unnecessary regulatory hurdles.

Even new laws meant to promote new industries would ultimately curtail corporate activity by expanding the discretion of government agencies.

Last month, Moon said the New Deal plan would be linked to a push for balanced growth between the Greater Seoul area and other regions. During a Cabinet meeting, he pledged that his government would do its utmost to ensure the initiative could reinvigorate local economies and facilitate balanced national development.

Seen from a critical perspective, he appeared to be adding a political dimension to the plan, with the next presidential election scheduled for March 2022, which will be followed by nationwide local polls three months later.

Taking into account political and other noneconomic factors would undermine the efficiency and relevance of the initiative, making it more difficult to ensure the profitability of the projects to be implemented under the plan.