Sub-Theme 3 | Contents of the Comprehensive Economic Stabilization Policy (CESP)
The CESP emphasized three core principles of ‘stabilization, autonomy, and open economy.’ The first principle, economic and social stabilization, focused upon controlling inflation as the first priority. The second principle, autonomy, focused upon strengthening the market mechanism for allocating resources by reducing government interventions in the market. The third principle, open economy, focused on promoting competition in the domestic market and increasing consumption opportunities.
The policy measures to control inflation before the CESP was basically regulations such as aggressive price setting and/or price ceilings of monopolistic and oligopolistic goods. Such regulatory policies brought about structural side effects on the distribution system, as well as creating dual price markets for many domestically produced goods. To deal with such structural issues, the government shifted its gears towards employing less intrusive policy tools such as managing aggregate demand (rather than supply), liberalization of imports, and reduction of tariffs. To eliminate the distortions in pricing mechanism, the government relaxed its aggressive control on prices by dramatically decreasing the number of items under the price control. ##MORE_LAYER_BOX##Over three times, the number of monopolistic items decreased from 148 to 35 and the number of price ceiling items decreased from 33 to 2 (briquettes and coals). Furthermore, prices of those 87 monopolistic items as well as those of public fees and government-licensed charges were actualized in phase towards market prices within a year.##MORE_LAYER_BOX_END## This created short-term price increases in almost all of the goods, but within a relatively short period of time the overall prices of these goods decreased due to an increase in supply. Tariffs on raw materials were also reduced and those goods that faced excess demands and supply shortages were secured from overseas markets.
Controlling sustained inflation, however, required very strict fiscal and monetary policy. As for tightening fiscal spending, the government decided to review all of the government expenditures from scratch, asking whether government spending for public goods and services could be justified --- so called, ‘zero-based budgeting’. This principle signified the spirit of the CESP, strengthening the tight fiscal policy and maintaining sound and balanced fiscal stance. Particular attention was paid to reducing the price spread of grains, imposing a ceiling on quantities of government purchases. Accordingly, 268 billion won in tax surpluses was used to repay the debt issued by the Bank of Korea (BOK), which reduced the money printing pressures. In addition, by reforming the financial sector and reducing policy-loans to strategic industries, the government further reduced the BOK’s burden to subsidize commercial banks. Thanks to these reforms toward a market-oriented economy, the BOK could be liberated from the old paradigm of providing “growth money” and carry out tight monetary policy to bring down inflation.