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The magic of confirmation bias

Published: 31 Oct. 2024, 19:34

Lee Sang-ryeol
The author is a senior editorial writer of the JoongAng Ilbo.

“Our economy is definitely picking up,” said President Yoon Suk Yeol in his briefing to the nation on Aug. 29.

The third quarter’s growth rate of 0.1 percent came as a shock to Koreans who remember the president’s remark. It is one fifth of the prediction by the Bank of Korea (BOK) of 0.5 percent. This makes it difficult for the economy to reach the BOK target of 2.4 percent, not to mention the government’s forecast of 2.6 percent. Deputy Prime Minister for Economic Affairs Choi Sang-mok said he would lower the growth rate estimate. Then, a former economy minister asked, “What’s the point of lowering the growth rate prediction? What we need is the countermeasures.”

Economic outlooks can be wrong. The problem is the perception of the situation. It has been 11 months since the state-run Korea Development Institute (KDI) diagnosed a “sluggish domestic demand.” But the Ministry of Economy and Finance has been claiming that there are signs of a rebound in domestic demand in the monthly economic trend for six months. That may have been the background of the president’s confidence. In the meantime, the economic growth rate marked minus 0.2 percent in the second quarter and 0.1 percent in the third quarter. Who is right after all? There are concerns that the government is mired in wishful thinking or confirmation bias of only seeing what it wants to see. When a diagnosis is wrong, the right prescription cannot be made.

The government counted on exports, but there are warning signals. Exports decreased by 0.4 percent in the third quarter, and the daily average export from Oct. 1 to 20 grew by a mere 1.0 percent from the previous year. China is no longer a golden market for Korean exports, and semiconductors and automobiles are growing weaker.

Due to the sluggish economy, tax revenues are declining. This year’s tax revenue shortfall is 29.6 trillion won ($21.5 billion). Nevertheless, the governing party is betting all on abolishing the financial investment tax and extending the oil tax cut again. Tax cuts can be sweet, but an inconsistent policy makes people anxious.

The more serious issue is the fall of the potential growth rate, the foundation of the economy. The OECD estimated Korea’s potential growth rate at 2.0 percent this year, lower than the 2.1 percent of the United States, whose economy is 15 times bigger than Korea’s. Some blame the world’s lowest fertility rate and fastest aging population. This is a fragmentary analysis. If a population decreases, a country must search for ways to enhance productivity and efficiently use resources.

But reality is going the opposite way. Last year, more than 1,400 core talents with masters and doctoral degrees left for the United States on a work visa, according to the Korea Economic Daily. Moreover, a British consulting company analyzed that 1,200 people with more than $1 million in assets will leave Korea. That means at least 1.7 trillion won of national wealth leaving the country. When talents and wealth leave Korea, how can productivity be enhanced?

Another problem is that people are losing trust in the government and economic system. For example, commercial banks are posting record-high profits this year, mostly from interest income. Under the control of financial authorities, deposit rates fell and only lending rates went up. In other words, banks are making profits at the expense of depositors and borrowers. The government’s intention is to prevent the real estate market from overheating. But if the economy moves contrary to common sense, the people’s “economic motivation” itself cools down.

Recently, the Economist analyzed why the U.S. economy is doing so well. It pointed to a number of factors, including the vast market, low level of regulation, the world’s best universities and the rule of law. Business dynamics are also notable factors. In America, the average rate of businesses opening and closing is 20 percent, much higher than Europe’s 15 percent. About 5 percent of workers in the U.S. change jobs in three months, while it takes about a year in Italy to see such a turnover rate. In other words, it is relatively easy to close a business or seek funds for a start-up in America — and it is easier for companies to dismiss employees and workers to find a new job. In the end, competitiveness is enhanced only when the financial market becomes efficient and the labor market becomes more flexible.

Neither poor growth nor a decline in the potential growth rate is “inevitable.” It’s just a result of not doing what should be done and doing what shouldn’t be done. Reform has become more urgent.

Translation by the Korea JoongAng Daily staff.