Lee Hyo-sik is Finance Desk editor at The Korea Times. He manages finance-related stories on macroeconomics, banks, stocks, bonds, crypto etc. He is passionate about covering what's happening in Korea's financial industry and explaining it to both Korean and non-Korean readers. You can reach him at leehs@koreatimes.co.kr. Your insights and feedbacks are always appreciated.
Save struggling self-employed
By Lee Hyo-sik
It is not uncommon these days to see shuttered shops even in busy streets in Seoul. The problems are far more evident in traditional markets and residential neighborhoods, as the years of stagnant consumption continue to wreak havoc on millions of mom-and-pop stores.
According to Statistics Korea, the number of self-employed totaled 5.61 million in April, down 6,000 from a year ago. This marked four consecutive months of decline since January, reflecting worsening conditions for small businesses.
Even convenience stores and coffee shops, once-formidable businesses that defied the economic downturn, have begun showing signs of trouble as consumers go into recession mode.
According to the National Tax Service, 95,337 cafes were in service in the first quarter of this year, down 743 from the same period last year. The number of convenience stores also slipped 455, down to 53,101 shops as of March.
Self-employed individuals have long struggled as Asia’s fourth-largest economy entered into a phase of low economic growth. The COVID-19 pandemic dealt a harsh blow to restaurants and other offline stores from 2020 to 2022, when people were virtually banned from going out. To survive through the pandemic, most small businesses took out massive relief loans from banks and state-funded institutions and the debt still weighs heavily on them.
According to the Korea Credit Data, outstanding loans extended by financial institutions to the self-employed reached 719.2 trillion won ($521.7 billion) as of March. They defaulted on loans valued at 13.2 trillion won in the first quarter of this year, up 42 percent from 9.3 trillion won a year ago.
Many had expected things to get better after the end of the lockdown, but there was little improvement because consumers were forced to tighten their belts to cope with soaring inflation as a result of pandemic-related disruptions to the global supply chain. Russia’s invasion of Ukraine in February 2022 made matters worse.
With higher wages, rent and other business-related costs, the prices of goods and services here have continued to increase over the past several years, leaving households with less money to spend on dining out and other consumption activities. After peaking at 5.1 percent in 2022, consumer price growth moderated to 3.6 percent in 2023 and 2.3 percent in 2024. But the figures are still higher than the Bank of Korea’s (BOK) 2 percent target.
Korea’s growing household debt is also hurting the self-employed as families spend more for housing and other living expenses. For instance, home prices have skyrocketed over the past few years as surging prices for building materials and higher wages dampened the construction of new apartments, particularly in Seoul and its surrounding areas. According to the BOK, the nation’s outstanding household debt totaled 1,929 trillion won as of March, the largest ever since December 2002, when the central bank first began compiling the figure.
Koreans’ shopping pattern has also shifted drastically as they buy more products from Coupang and other large corporate online retailers at the expense of offline mom-and-pop stores. In addition, an increasing number of people travel abroad rather than visiting domestic tourist destinations and spending money at local retailers.
Even if Koreans earn more over the years, their tendency to consume has declined, according to a recent study by the Korea Chamber of Commerce and Industry. The average household ratio of consumption to disposable income dropped to 70.3 percent in 2024 from 73.4 percent in 2014 as families faced rising expenses, including higher interest on loans and higher taxes.
In particular, people aged 65 and older show a greater tendency to save as they live longer. The ratios for those in their 60s and 70s fell to 70.3 percent from 73.6 percent and 76.3 percent from 79.3 percent, respectively. With more Koreans getting older, this is certainly not good news for the self-employed.
In addition, with more people from the post Korean War baby boom (1955 to 1963) opening restaurants, coffee shops and other independent businesses to earn a living, competition for a shrinking number of customers has intensified.
In contrast to their younger peers, the number of the self-employed who are 60 and older increased to 2.1 million in 2024 from 1.42 million in 2014, according to the central bank. With later baby boomers (1964 to 1974) nearing retirement age, that figure is expected to reach 2.5 million in 2032. Low entry barriers have encouraged many retirees and laid-off workers to start their own stores as they failed to find new company jobs.
It is becoming imperative to persuade more people from this generation to look at alternatives to self-employment, as they are more likely to fail than succeed without prior business experience. If they fail, they end up losing their life savings and falling into poverty.
According to the National Tax Service, only about half of self-owned businesses survive beyond three years and nearly 60 percent close within five years amid the deepening economic downturn. The three-year survival rate of the top 100 self-employed sectors stood at 53.8 percent in 2023 and the five-year rate came to 39.6 percent. The rates are likely to be much lower for last year and this year, given the prolonged economic downturn.
Newly-elected President Lee Jae-myung vowed to draw up a new 35 trillion won supplementary budget to prop up domestic demand, but he has to do more.
Lee must place top priority on restructuring uncompetitive mom-and-pop stores in overcrowded areas. While providing debt relief and other financial support to help ensure a soft landing, the president should initiate structural reforms to enhance the long-term viability of self-employed businesses, even though it is politically unpopular. His administration also needs to guide unprofitable small business owners through an orderly exit and support them in heading back into the labor market.
With the Korean economy forecast to expand only 0.8 percent this year, according to the central bank, the role of the new administration is more crucial than ever in improving the livelihoods of self-employed individuals and their family members.
The writer is finance editor at The Korea Times.