Income-led growth policies need overhaul

• Published May 16, 2018 4:58 PM KST
• Updated May 17, 2018 4:21 PM KST

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By Kim Jae-kyoung

President Moon Jae-in came into office one year ago with lofty pledges to rejuvenate the economy. He promised to create more jobs for the young and ensure better lives for middle- and low-income families. However, the first-year economic scorecard for the Moon administration is disappointing. His income-led growth policies have failed to deliver intended outcomes. Exports have started to contract, youth unemployment is high, corporate investment is in the doldrums and consumer prices are sharply rising.

On the occasion of the first anniversary of President Moon and his administration, which fell on May 10, The Korea Times conducted interviews with six global economic experts to evaluate Moon's economic policies and examine the current state of the Korean economy. They are California State University-Channel Islands economics professor Sohn Sung-won, National University of Singapore economics professor Shin Jang-sup, INSEAD Singapore Campus economics professor Antonio Fatas, and ING Bank Asia-Pacific chief economist Rob Carnell in Singapore; Natixis Asia-Pacific chief economist Alicia Garcia-Herrero in Hong Kong; and Moody's Analytics Korea economist Katrina Ell based in Australia.

The following discussion has been reconstituted based on separate interviews, which were conducted from May 7 to 14. ― ED.

Q: How do you evaluate the first year of the Moon administration in terms of economic policies? Can you identify any good or bad policies?

Katrina Ell: I would say Moon's first year should be classed as average and disappointing. There was a spike in confidence after he came into office in anticipation that there would be meaningful positive change for the economy, particularly with his pro-employment agenda, but unfortunately that has not come to fruition. There have been several disappointing developments, particularly around the youth unemployment rising, when it was one of his specific policies to address the chronically high level of unemployed young people.

Shin Jang-sup: I think in terms of economic policies, Moon's first year was terrible. I can't find even one policy that has been conducive to economic growth. Most of his policies have done the economy a disservice. Among them, the worst is his anti-business policies that discourage large firms from making new investments and hiring new employees.

Sohn Sung-won: A successful renegotiation of the KORUS FTA was a significant achievement. However, business tax increases and the higher minimum wage have hurt job creation.?The Moon administration has begun chaebol reform. It needs to go much further to make the economy more efficient and raise productivity.

Alicia Garcia-Herrero: On the economic side, my take is that Moon has felt short of shaking the Korean economy from its key weaknesses. I think the minimum wage and welfare policies are a double-edged sword. Korea has more space than Europe but it still needs to be done carefully. He needs to review one-size-fits-all type of policies. He should run more targeted policies _ for the elderly and the young.

Antonio Fatas: ?Many of his policies have a social objective _ higher minimum wage, stronger welfare system and so on. From an economic point of view there is always a debate on how those policies will affect growth. Some view them as very damaging because of the distortions they might introduce. I have a different view. While one should be aware of distortions, social cohesion and protection can also be a model for growth. The performance of high-tax, strong social welfare systems in Europe have been as strong as or even stronger than that of the U.S. with much weaker welfare support.

Rob Carnell: Although not particularly market friendly, the Moon administration has realized that a strong domestic economy relies on more than just a cheap workforce providing export-centric industry price competitiveness. You also need a population where the median worker can exist comfortably on median wages (benefits hikes) and where unemployment is low (civil service jobs). This is helping Korea to grow even as the export sector looks to be slowing, as global demand for semiconductors and handsets faces a cyclical downswing.

Q: What do you think are the biggest risks to the Korean economy?

Shin: Widespread anti-business sentiment is hampering economic growth. In the name of reform, state regulators, including the Fair Trade Commission and the labor ministry, are aiming at conglomerates. It is not easy to foster a large, established company. They should get rewards for creating such firms, not punishment. These policies have dispirited enterprises and driven them out of the country. In this environment, who wants to make big investments? What is more worrisome is that most medium-sized firms do not want to become large companies as they don't want to be a target of government attacks.

Fatas: The challenge for South Korea is about competitiveness, innovation and productivity in particular in some sectors. Moon seemed to be aware of it and is pushing for pro-competitive reforms. But will he push hard enough? The biggest risk is complacency and the difficulty to challenge the current economic and business model that has served a purpose but needs to be changed in certain sectors.

Ell: I would say the biggest risk to the South Korean economy is from the elevated trade tensions between the U.S. and China. South Korea relies on exports to drive growth and the U.S. and China are both major trading partners. If the differences between the U.S. and China can't be ironed out in the coming weeks then there will be significant protectionist measures introduced that will result in reduced global trade flows, in turn hurting Korean manufacturing and exports, flowing through to the broader economy. Our baseline scenario remains that a trade war between the U.S. and China will be avoided.

Carnell: Korea's export sector is heavily reliant on electronics and handsets, and this could be facing a cyclical downswing. This could also be wrapped up in rising inventory levels, and a classic inventory-led cyclical downswing in industry is looking possible, if not probable, which will require some offsetting fiscal stimulus.

Garcia-Herrero: China is moving up the ladder basically competing directly with Korea in most sectors. Household debt is another big issue to handle.

Sohn: Economic policy is skewed toward distribution rather than growth. Monetary policy has not been supportive of economic growth and there are too many unnecessary regulations.

Q: Which areas should President Moon prioritize to reinvigorate the economy and ensure sustainable growth for the rest of his tenure?

Shin: The Moon administration should shift its economic policies to pro-business or market-friendly ones so that more firms make profits, which should, in turn, lead to more investment and job creation.

Ell: Policies to reinvigorate South Korea's growth should focus on lifting domestic demand. That would be policies to lift income growth that could include more focused incentives for firms to employ younger workers, especially in the private sector rather than just creating unproductive jobs in the public sector.

Sohn: Further deregulation and?chaebol reform as evidenced by the Korean Air scandal. While he was elected professing to redistribute the country's income among its citizens, it may have gone too far in that direction. Economic growth supported by job creation by the private sector is needed.

Garcia-Herrero: Moon should reduce the size of old economy-type industrial groups with very low return on assets. Shipping is obvious but there are many where less has been done.

Ell: Another strategy in the longer term could be to better align tertiary education with the skills desired by employers. There's little point emerging with impressive qualifications if they don't lead to a long and prosperous career within Korea. This could be addressed via direct liaison with institutions, questioning why young, well-educated South Koreans are generally not desirable employment candidates.