New president's economic challenges

By John Burton

It is regrettable that the main candidates in the just-concluded presidential election did not spend more time talking about the structural challenges facing the Korean economy, such as low productivity rates, the high level of household debt or the impact the aging population will have on future government spending. But with a new team now set to enter the Blue House, here is a checklist of the difficult economic issues the incoming administration must deal with over the next five years:

― Rapidly aging population: The single greatest challenge that Korea faces is the fact that in the next 20 years it will become one of the world’s most rapidly aging populations, which will place huge demands on medical and other social services.

― Government spending: Promises by both the ruling and opposition parties to expand the social welfare system will considerably increase government spending if the proposals are implemented. But left unmentioned during the campaign was whether Korea can afford the wide-ranging improvements. On paper, state finances are strong with the government debt amounting to only 57 percent of gross domestic product, one of the lowest ratios among the advanced OECD economies. But the reality is that there would have to be a sharp rise in tax rates to support more social services and the burden would have to be borne by a shrinking percentage of the working population as the number of elderly grows.

― Low productivity: Although productivity in the manufacturing sector remains globally competitive, particularly among the chaebol, the opposite is true for the domestic service sector where most of the population is employed. The profitability of service businesses is poor because of bureaucratic red tape, market restrictions and indirect taxes that harm their competitiveness.

― Stagnant income growth: Incomes in Korea as a percentage of gross domestic product are on a par with China and have been stagnating since the mid-2000s because of declining corporate profitability. This has helped fuel popular demands for more social welfare benefits.

― High household debt: Given the relatively low wage levels compared to other advanced economies such as the U.S. and Japan, households have been forced to borrow heavily to keep up with rising education costs and the purchase of overvalued housing. Korean household debts are among the highest in Asia at 85 percent of GDP and in terms of debt relative to disposable income, Koreans rank alongside the British and Australians, the world’s most highly leveraged populations.

― Rising income inequality: The combination of stagnant wages and high household debt is creating a growing gap between rich and poor, although it has not yet reached the levels seen in other countries, such as the U.S., Hong Kong and Singapore. This led to the calls for “economic democratization” and restrictions on the market power of the chaebol.

― Premature retirement age: Korea effectively has a retirement age of 57 because companies purge expensive older workers. This represents a waste of experienced staff and creates another social problem since many retirees lack generous retirement benefits, which adds to the financial burden on families.

― Discrimination against female employment: Korea has one of the lowest female labor participation rates in Asia despite the high education levels of its women. This reflects social mores that women should focus on raising a family once they marry, while companies are relatively inflexible in dealing with the needs of female workers who have children. Such attitudes deprive the labor force of talented employees when the working population is set to shrink as society rapidly ages.

― High education costs: Rising education fees, particularly for private tutoring and hagwon studies, is another factor contributing to the economic difficulties of families. Although the investment in education has placed Korean students among the top in the world when it comes to scores for math and science, it has not paid off in terms of creating employment opportunities. The jobless rate among recent university graduates is estimated to be more than 10 percent, which is a potential source of political discontent.

The prescriptions for solving these challenges are quite clear. They include deregulation for small businesses as well as providing them with better access to financing, while the chaebol ownership structure should be altered by promoting the rights of minority shareholders and dismantling cross-shareholding arrangements.

To keep government spending under control, means testing should be applied to programs such as free school lunches, cuts in university tuition and state support for medical expenses. As for easing the financial pressure on households, some form of debt relief should be introduced for those seriously in arrears and limits imposed on the current high interest rates charged by private lenders.

Implementing these changes would provide more equal opportunities for all Koreans but to do so the new administration will have to overcome resistance from vested interests, including chaebol owners and the bureaucracy, as well as public acceptance that state welfare support should focus on those most in need rather than taking a universal approach.

John Burton, a former Korea correspondent for the Financial Times, is now a Seoul-based independent journalist and media consultant. He can be reached at johnburtonft@yahoo.com.