South Korea’s experimental growth model adopted by the new government under liberal President Moon Jae-in, who has proposed wage increases and higher taxes on the rich to stimulate economic growth and even out inequalities, has been challenged by a renowned Harvard University macroeconomist.

"There is little indication of a systematic relationship between inequality and economic growth," Robert Barro, economics professor at Harvard University, said on Tuesday during a session titled ‘New Economic Growth Engine’ at the 18th World Knowledge Forum in Seoul hosted by Maekyung Media Group.

“I know of no evidence that less inequality implies less uncertainty about future growth.”

His comment is a direct criticism on the new government’s push to increase taxes for public policies designed to boost household income and expand the social safety net. The tax code has recently been revised to increase top-bracket corporate and income tax rates by 3 percentage points and 2 percentage points, respectively, from next year.

Barro said he found it rather hard to understand why income inequality in South Korea is suddenly a major priority issue, citing that the level of income inequality in Korea is lower than that of the U.S. and China and similar to that of Germany, France and the U.K.

“Raising corporate income tax rates and marginal income tax rates at high incomes would tend to retard South Korea’s economic growth,” he warned.

He also expressed concern at the Korean government’s efforts to increase transfer payments through welfare programs. Taking the U.S. case after the recession, he explained there was no evidence that heightened transfer payments promotes economic growth.

“I would not expect this kind of government policy to be effective in promoting recovery and encouraging economic growth,” he said.

He pointed out that South Korea, along with China, has been “one of the heroes of economic growth” and is an “inspiration” to other countries. “It’s not a good idea for South Korea to go away from this longer-term vision and success involving strong economic growth,” he said. “The policies put in place now should be growth-oriented toward maintaining reasonable rates of economic growth.”

Regarding the “innovation-led growth” pursued by the current government, Barro said that the focus has to be on activities that encourage productivity and as innovation can encourage productivity growth, “technological progress related to innovation is important.” He emphasized that companies, rather than the government, should take a leading role in searching for promising areas in innovation.

Although Korea in the past had pursued industrial policies encouraging particular sectors, he said that at the country’s current mature stage such policies are “not a favorable way to promote economic growth and productivity,” adding that it is “better to allow the market to operate and for businesses to direct the flow of investment.”

Barro, one of the founders of new classical macroeconomics, has remained in the top five of the world’s most influential economists list by the Research Papers in Economics over the last several years.

Moon’s economic policy has been strongly contested by the business community, which has warned that a double-digit hike in minimum wages, conversion of contract workers to permanent status, and corporate tax increases could damp corporate sentiment, investment, and hiring rather than boosting jobs, income, and growth.

The WKF, an annual forum hosted by Korea’s largest business media Maekyung Media Group, is held until Oct. 19.

By Lee Yu-sup and Kim Hyo-jin

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]