Foreign workers new engine for economic dynamism

Foreign workers play tug-of-war at Shalom House in Namyangju, Gyeonggi Province on Oct. 18, 2009. Today foreign workers can be found in most major industries. The role of foreign workers will be crucial in keeping economic dynamism amid the falling birth rate and the aging society. Both foreign partners and workers add diversity to Korea and create attractive alternatives to a homogenous uniculture . / Korea Times photo by Ryu Ho-jin

By Tony Michell

During the last decade the number of foreigners living in Korea has grown from about 300,000 to over one million. Foreign workers have grown rapidly from 300,000 to 670,000 plus an estimated 300,000 illegal workers. These estimates do not necessarily include F visa foreigners who have residence through marriage to Koreans, many of whom may be economically active either in household economies, farms or in business.

Think of any stated public policy goal: faster economic growth, support for small and medium sized industries, encouraging foreign investment, creating an open and diverse society, making Seoul an international city, labor flexibility or keeping industry on shore, through regional development and handling an ageing society and workforce. In each case the contribution of foreign workers to Korean policy and to Korea’s continued development is significant.

Korea is not the first country to have enjoyed the benefits of guest workers and immigration. Western Europe, during its full employment years of the 1960s, encouraged the growth of “guest workers” or in the case of Britain permanent immigration from the British Commonwealth. America, Canada and Australia continue to enjoy a refreshment of the work force through in-bound migration. Japan by contrast restricted this development and has paid a price in economic stagnation.

We are used to reading statements or articles which indicate that Korea’s growth potential is falling as in the OECD report issued in May 2010.

“In its latest economic outlook, the OECD said that South Korea's potential growth rate would tumble to an average of 2.4 percent between 2012 and 2025.”

On this basis Korea would hit an average of 4 percent in 2010 and 2011, the highest figure among its 30 member countries. The number is three times higher than the OECD's average of 1.2 percent. Korea was forecast to rank fifth at 3.7 percent, in the 2012 to 2015 period followed by Turkey, Chile, Slovakia and Luxemburg, but its rate may suffer a steep decline, halving to 1.9 percent from 2016 to 2025, below the OECD average of 2 percent.

"It is no wonder that the potential growth rate will go down due to the low birthrate and an ageing society. From 2017, resources and employment will play a limited role in boosting economic growth due to a falling population of those of a working age," Samsung Economic Research Institute (SERI) Vice President Hwang In-seong told The Korea Times.”

All such projections fail to take into account the additional contribution of foreign workers who can either stand the projection on its head, or at least delay the event by a decade or more, depending on government policy.

Economic contribution

The ingredients of economic growth are normally considered either as simply the amount of new labor, and capital added, and the effective rate of utilization of plants and equipment, either in terms of productivity or other improvements, or more sophisticated expressions related to the same factors of production. In a country in which the younger cohorts of the work force are growing fewer in number each year, the only way to add labor is to import it. OECD and other economists are reluctant to include such calculations since immigration is subject to government policy and not economic fundamentals.

Given that young Koreans often prefer either studying or simply not working, to employment, the contribution of younger foreign workers increases. In the 1990s and early 2000s foreign workers congregated in some segments of the 3D (dirty, dangerous and difficult) job sector, which Koreans did not want to take. This particularly applied to small manufacturing enterprises. Today foreign workers can be found in most major industries and in particular shipbuilding, as the core of the unskilled workforce, and in others as a flexible resource that can be easily added if customer demand surges.

Keeping jobs

The crude GDP growth potential model consisting of new members of the workforce, plus capital, does not take into account the fact that before new growth can take place, jobs which disappear need to be replaced. Korea, like any other country, has a continual job loss as industries change, improved productivity eliminates waste and production shifts off-shore. Korea, a leading exporter of manufacturing products, is particularly vulnerable to industry migration. You can see the exodus of clothing, footwear and the most labor intensive phases of electronics manufacturing. Adding foreign workers to any plant generally preserves the industry in Korea, and gives reason for reinvestment rather than moving off-shore.

It is conventional to argue that Korea should move from a manufacturing-based structure to a service-based structure. Analysis of exporting countries like Germany or Japan suggests that Korea’s present structure is not unusual. Korea should and has developed export-related services and can greatly increase industrial services, but it is retaining industries through employing foreign workers.

Rather than thinking that foreign workers take jobs from Koreans, rather think that for every foreign worker employed, three or four Korean jobs are saved. The more vulnerable industries may require two foreign workers to save three Korean jobs. Without this additional input, the whole industry would migrate to a lower cost country. Capital that might have been invested in Korea flows out to another country.

Who’s a foreign worker?

So far we have discussed foreign workers as though they are unskilled factory workers. But this is far from accurate. Foreign workers include English teachers, wives (and husbands) of Koreans, heads of foreign multinationals and an increasing number of skilled managers and specialists working for Korean multinationals and based in Seoul. The list does not end there, for foreign students working part-time in restaurants and foreign workers may join those who came to Korean as entrepreneurs. It could even be extended to include foreign lawyers working on deals on behalf of Korea’s blue chip companies who are still prevented from legally residing in Korea but who commute from Hong Kong to serve their clients. In short, foreign workers broadly defined fill every gap and niche in the Korean economy.

Foreign entrepreneurs

Not all foreigners work in industry. The City of Seoul has recently opened a center for foreign entrepreneurs to base themselves. Unfortunately at the beginning of 2010, the Ministry of Strategy and Finance removed a very long standing incentive to entrepreneurs to base themselves in Korea. This was a tax concession which dated back to the 1970s, originally in the form of Tax Payers Associations, which has allowed entrepreneurs to pay themselves low wages and still cover the costs of being a self-employed foreigner in Korea, which are considerable in terms of education of children, housing and maintaining links with the home country. This change in tax policy has created difficulties for a proposed scheme to start an entrepreneurs’ zone in Jeju-do which might have become a future “orange game valley” for the country.

Korea has a potential to attract entrepreneurs in the future in the same way as California and Vancouver have created entrepreneur belts based on foreigners. Silicon Valley was built by Indian and Taiwanese entrepreneurs who made up 50 percent of the community in the past. Recently Korean Universities have attracted large numbers of foreign students who learn languages, business and technical subjects, and form an important part of Korea’s future, as these universities become world class in a range of subjects related to Korea’s leadership in various technologies such as automotive, electronics, telecommunications and games and cultural leisure grows. Foreign students are part of the growth potential which reports like that from the OECD miss.

In most inbound educational centers, students frequently wish to stay in the country they have studied in. Korea is no exception. Australia has the most attractive incentives to stay, but the potential for Korea’s large firms to offer trainee and scholarships to foreign graduates of Korean universities needs to be developed further.

Cultural diversity

Previous Seoul Mayor Lee Myung-bak, currently President, has spoken of the need to create a truly international city in Seoul that will attract residents from the full panoply of foreign nations like London, New York, Sydney or Hong Kong. For this reason Seoul has created the Seoul Global Center that seeks to promote the welfare of foreigners residing or touring in Korea, and to hold a multitude of festivals. But the secret of a successful international city is that it thrives on international residents who live and work in it.

This is not confined to Korea’s major cities. The growing trend of international marriages between Korean men, especially in rural areas, with wives from other countries makes a large contribution to Korea’s regional growth potential. By stabilizing rural populations, the willingness of foreign brides to come and live in the regions of Korea which are less developed is significant. But these immigrants also help boost the birth rate and as they go to work, increase the active work force.

Both foreign partners and workers add to the diversity of Korea, creating attractive alternatives to a monotonous uniculture with offerings like the Little Manila phenomenon, among other developments, particularly the growth of foreign restaurants offering a global range of culinary delights which are so attractive to foreign tourists and shops catering to every kind of taste. A walk through any street in Itaewon will show the strength of diversity from African, through Indian to Halal offerings from a variety of nations as well as French, Italian, Thai and even Bulgarian restaurants. Seoul would be very much the poorer without this diversity. Equally, without foreigners working and living in Seoul there would be no international schools even though these cater to many Korean children born abroad.

Box; Policy to support foreign workers needed

If foreign workers and residents are going to make an increasing contribution to Korea’s growth potential, then one might expect a comprehensive policy to support them. Unfortunately Korea’s legacy visa system which dates back several decades works against this. A glance at visa statistics shows that the foreign workers are divided among a multiplicity of visa numbers and sub numbers like E-4-5. This puts a serious burden on the immigration service which is under conflicting pressure to both tend to the globalization of the country and restrict residents according to arcane laws like the size of a restaurant and government commendations for companies in order to obtain a visa for a foreign worker. Non transparency in turn leads to corruption. Consequently the lack of a comprehensive policy creates a barrier for many potential developments.

"'In order to hold the potential growth rate at the 4-percent level, the government has made efforts, unearthing new growth engines such as green industries," an official of the Strategy and Finance Ministry told the Korea Times in May . "But an ageing society and a lack of jobs are big obstacles to growth."

The answer lies not just in new industrial growth engines, but in the recognition that foreign workers and residents themselves represent a new growth engine. There is a need for better integration of foreign workers and foreign residents who now make up more than 2 percent of the population, but add (on my rough calculations) considerably more to the GDP and to the quality of life for both rural dwellers and city dwellers. Sadly the contribution is not formally recognized at the policy-making level, and at the operational level of the Ministry of Justice where visas are granted, nor in the department of the Ministry of Strategy and Finance in which tax policy is made. The change becomes more urgent as Korea moves toward being one of the top four fastest ageing societies in the OECD in the 2020s. Would older Koreans rather have their pension curtailed or their contributions supplemented by those of young foreign workers?

Who is Tony Michell?

The writer first came to Korea in 1978 and worked in the Economic Planning Board, now part of the Ministry of Strategy and Finance. He worked on many World Bank, UNDP and ILO employment creation and deregulation projects, and later for Tetra Pak Korea where he was part of the team that created Pak Soju. He helped create part of the early Korean overseas aid programs, working on projects in Nepal, Bangladesh, Pakistan, Indonesia and Papua New Guinea. He founded Korea Associates Business Consultancy Ltd which worked with the Economist in organizing conferences and seminars throughout Asia. His recent book Samsung Electronics and the Struggle for Leadership of the Electronics Industry has just been published by John Wiley. He can be reached at tonymichell@kabcltd.com