By Professor Eugene Yun (International Studies)
A student once challenged me to describe in one word what economics is about. Several words came to mind, but they were unsatisfactory. "Happiness" was too vague, "money" narrow, and "decision-making" too abstract. I also thought about supply and demand, development, optimization, programming, and efficiency, but quickly rejected them.
A good question deserves a good answer, so I asked the student to give me one day to think about it. My mind worked hard all day. As soon as I met the student the next day I hurriedly said, "Tradeoffs." Surprisingly, this announcement produced no response and we parted without saying another word.
My dictionary says that a tradeoff is an exchange. To an economist, a tradeoff exists when you have to sacrifice one thing in order to gain something else and this is exactly the subject of economics.
It is extremely hard (at least for me) to think of an activity undertaken by men and women involving no tradeoffs whatsoever. Another way of saying this is: "There is no free lunch."
Fortunately, the nature of many tradeoffs is quite easy to recognize. For example, your friend buys you lunch and asks if she can borrow your car, or McKinsey gives you a job as a consultant and offers you 100 million won a year. In general, tradeoffs with two simple elements are easy to analyze. We do it fairly instinctively.
From time to time, however, the problems are too complex and our economic instincts fail us. A good example is Korea's negative sentiment toward foreign capital.
A string of provocative stories in the local press about foreign investors making large profits in Korea has drawn an angry reaction from the public-at-large. It is not clear what motivated the government, but around the same time, the powerful Financial Supervisory Service and the Tax Office swung into action with the so called "Five percent rule" and tax audits of foreign private equity funds, respectively.
Officially, the government is just doing its everyday job. They claim there is no intent to single out foreign capital for any kind of a backlash. Foreign investors, however, are quite nervous and therein lies the rub.
Evidently, the Korean government is trying to manage a complicated set of tradeoffs. The giant optimization equation involves national pride, bureaucratic control, chaebol capital, foreign capital, corporate governance, financial sector reforms, exchange rates, political support and drainage of national wealth, to mention a few of the most obvious factors.
What are the chances of the government "correctly" solving this monstrous tradeoff problem? Your answer depends on how you define "correctly." Various lobby groups who have a vested interest in the problem will attempt to distort in their favor the true nature of the tradeoff.
There is nothing wrong with Korea deciding to put up some barriers to hinder inward bound foreign capital. But we should understand exactly what it is that we are giving up as a part of the tradeoff. As the saying goes, "There is no free lunch."