In the Shadow: Korea’s Economic Outlook
All eyes are on North South relations. We have witnessed a series of momentous events and are about to witness (hopefully) a historical summit between Donald Trump and Kim, Jong-un. North Korea has completely consumed the attention of the Moon, Jae-in administration and overshadowed attention to Korea’s economy.
Nevertheless, most forecasts are optimistic and predict that the economy will remain on track to grow 3% in 2018. Industrial production, government spending and consumer confidence are all robust. Trade is edging upwards.
However, challenges lurk on the horizon both at home and abroad. Externally, growing US trade barriers threaten major Korean exports such as steel, washing machines and solar cells. Relations with China are improving but the effects of China’s blacklisting of Korea over the THAAD missile defense system continues to restrain Korean firms. Europe’s lackluster economies further cloud export recovery.
Internally, economic challenges are structural and persistent. In spite of positive signs for 2018, Korea’s economy continues to face three fundamental hurdles:
- Dominance by the chaebol, the family-controlled business networks stifles SMEs and startups
- Excessive regulation hamstring’s business
- Labor inflexibility (complicated by a rapidly aging population) undermines restructuring and productivity improvements
President Moon, Jae-in, now starting his second year as Korea’s president, is riding a high wave of popularity particularly among the young population; he is humble, highly accessible and appears genuinely concerned about the people. He presents a friendly, upbeat image which is a welcome contrast to his predecessor. The upcoming elections on 13 June are likely to further strengthen his mandate.
His overriding economic objective is to achieve a better balance of wealth and opportunity. To this end, he has pledged to enhance social welfare systems and improve employment. He has challenged the chaebol and promised to support SMEs. These goals are all commendable but will the tactics that he is employing achieve their desired results? He has pledged to raise the minimum wage by 15% per year for 3 years but the result is more likely to increase unemployment than to improve the lot of the neediest workers. He has pledged to reduce the maximum number of weekly working hours from 68 to 52 with the objective of spreading around the work and thus creating new jobs but labor is disgruntled by the loss of overtime pay. The administration has promised to create 810,000 civil service jobs to improve public services but this will inevitably increase the public tax burden. In spite of the pledge to support SMEs and startups, the ecosystem for small firms remains challenging. The administrations ‘anti-chaebol’ attitude has proved to be more across the board ‘anti-business’. Increased regulations and reporting requirements have resulted in greater government control and lower flexibility, particularly for SMEs that are already constrained by limited resources. They suffer the most under the myriad of regulations and reporting requirements. Furthermore, they directly feel the burden of increased taxes, rising minimum wage and limitation on working hours.
Policies that are focused on redistributing wealth rather than on economic well-being bode ill for Korea. Economic policies resulting in higher taxes, tougher regulations and rigid work rules will merely erode Korea’s global competitiveness and lead to further deterioration of economic opportunities for all citizens. A sustainable future is dependent on creating value and improving productivity not increasing taxes and regulations. Providing opportunities for the less fortunate depends on a growing pie not redistribution of the existing pie. Policies must focus on creating a vibrant, innovative, dynamic environment for entrepreneurs, startups and SMEs. A fair and transparent marketplace will enable these firms to lead the economy into the “Fourth Industrial Revolution”.
Given the current administration’s track record over the past 12 months, perhaps we should be grateful for the distraction from North South issues as it may minimize meddling in the economy.
The author, Peter Underwood, is Managing Partner at IRC Consulting, a Korea focused business development consultancy in Seoul. http://www.ircconsultingkorea.com