Value context and insight. lkm@koreatimes.co.kr
State intervention hurts productivity, innovation
By Lee Kyung-min
Analysts call for gov't to 'encourage healthy competition in the market'
By Lee Kyung-min
State intervention and lack of technology innovation have become a major stumbling block for Korea and its companies to finding a growth breakthrough, experts said, Monday.
They called for the Moon Jae-in administration to come up with measures to ease rules and offer incentives for the private sector to foster more competition and try innovative things without concerns over bureaucratic controls.
“Excessive regulation in Korea will continue to pose major hurdles to businesses, many of which will lose motivation,” said Park Chong-hoon, chief economist at SC First Bank.
“In such a business environment, higher minimum wages without a corresponding increase in workers' capacity is a sure recipe for low productivity,” he added.
A rapid hike of the hourly minimum wage over the past two years and a shorter workweek to 52 hours from 68 are key government policies pushed ahead by the Moon Jae-in administration to help guarantee “fair competition” following outcry over widening social and income inequality and an “uneven playing field.”
In its recent report, the Organization for Economic Cooperation and Development (OECD) stressed that Korea's key challenge is to raise labor productivity.
“The robust labor supply that has offset low productivity is shrinking with the cut in maximum weekly working time from 68 to 52 hours and the decline in the working-age population since 2017,” the report said.
The report showed that Korea's gross domestic product (GDP) per hour worked, a measure of labor productivity, was ranked 29th out of the 36 member countries in 2017.
Lee Seung-suk, a research fellow at the Korea Economic Research Institute (KERI) supervised by the Federation of Korean Industries (FKI), said that state intervention will end up doing more harm than good for the economy.
“Whenever the government attempts to intervene in the market, it causes more of a backlash than a positive outcome, especially when it seeks to exert direct influence in labor costs, a key determinant to successful corporate profit. Businesses are forced to overpay the workers,” he said.
Lee believes that businesses in Korea will continue to suffer due to excessive government intervention in the market, compounded by an overall economic slowdown amid cyclical downturn, according to another economist.
“Businesses simply have no incentive to hire now,” he said. “The country has no reason to increase labor force amid little- to non-existent development in the technology that could underpin an industry.”
He pointed out that the adverse circumstances are further exacerbated by the “income-led” growth.
“Businesses should determine the amount of pay in accordance with workers' individual productivity, and attempts to counter the longstanding market principle by setting guidelines only hurt corporate profit,” he said.
Experts said that another major hurdle for Korean companies is their lack of technology innovation.
Park of SC First Bank said the situation is unlikely to improve given development of a new technology will be “sheer luck.”
“The thing about technology is that it is hard to predict, and much harder to guarantee a success. This is why they associated it with a great deal of luck,” he said. “Korea might not be able to foster the technology to the extent that can robustly grow the economy.”
Given game-changing, new technologies are hard to come by, the economy has no momentum for growth amid continued decline of the manufacturing, the traditional pillars of the Korean economy.
“Shipbuilders, auto makers have led Korea's growth in the global stage, but many have gone under due to industry-wide slowdown, straining the country that has yet to identify a new source of growth to replace them,” Lee of KERI said.
To address the issue, experts stressed the importance of speeding up deregulatory efforts.
Alicia Garcia-Herrero, Asia-Pacific chief economist at Natixis Global Market Research, said the regulatory directives should focus more on encouraging healthy competition in the market.
“The problem is creativity and innovation which are fostered by competition. The competitive environment in Korea is cushioned by the lack of real access by foreigners. Korea needs to import talent and open to foreign companies also,” she said.
Mauro F. Guillen, director of the Lauder Institute at the University of Pennsylvania's Wharton School, suggests that the Korean government should develop policies in line with its growth stage.
“Korea is now a rich country, but does that not mean it has plentiful jobs. This happened in Europe since the 1970s, with relatively high unemployment, and during some years in the U.S.,” he said.
“I would not recommend cutting wages or making workers do more, but making it easier for workers to find new skills they may need to find jobs, and to ease hiring rules.”