Korea urged to rethink growth strategy

Moon should place top priority on boosting private sector

By Kim Jae-kyoung

South Korea needs a new growth strategy.

The economy is losing resilience and vitality under President Moon Jae-in's income-led growth strategy.

Businesses are reluctant to make investments and hire new employees, while consumers shun spending due to the higher burden of taxes and interests.

Creation of unproductive jobs in the public sector supported by taxes has made civil service exams most popular among college graduates. Most young Koreans are seeking stable jobs rather than taking risks, which renders the economy enervated.

Moon's inclusive growth strategy aimed at producing more jobs with taxes and reducing income inequality has distorted the labor market, dispiriting enterprises and dampening domestic demand.

Simply speaking, his policies have good intentions but failed to deliver intended outcomes of offering better lives for middle- and low-income families.

“While he was elected professing to redistribute the country's income among its citizens, it may have gone too far in that direction,” Sohn Sung-won, professor of economics at California State University-Channel Islands, told The Korea Times.

“Economic policy is skewed toward distribution rather than growth, and there are too many unnecessary regulations. Economic growth supported by job creation by the private sector is needed.”

One year after Moon took office, the state of Asia's fourth-largest economy looks dismal. Employment, exports, domestic demand and production are all pointing to a downturn.

The youth jobless rate has stayed above 10 percent, while manufacturers' factory operating ratio fell to 70.3 percent, the lowest level since March 2009.

Exports contracted 1.5 percent in April, the first year-on-year setback since October 2016. In March, facilities investment shrank 7.8 percent and industrial output contracted 1.2 percent from February.

What is more worrisome is the situation is set to further deteriorate.

According to a report released Sunday by the OECD, its composite leading index for Korea, an index used to gauge the direction of the economy, dropped to 99.76 in February, the ninth consecutive month of decline since May 2017.

A reading of below 100 indicates the economic conditions will worsen in six months. This is in contrast to other OECD members that have been rising in recent months to stay above the 100 mark.

Isolated from economic boom

Korea is traveling a different path from most advanced countries enjoying economic booms.

For example, in the U.S., firms are improving performance and unemployment is at a historic low as a result of tax and regulatory reform.

The Trump administration has lowered taxes and releasing the shackles of regulations on businesses, the exact opposite of what the Moon administration has done.

These bleak results should come as a clarion call for President Moon Jae-in to overhaul his income-led growth strategy.

Experts say Moon should shift the focus of his growth policies to the private sector so businesses can get more actively involved in economic activities and play a bigger role in job creation. To that end, they said the government should end its anti-business policies.

“Widespread anti-business sentiment is hampering economic growth. It is not easy to foster a large, established company. They should get rewards for creating such firms, not punishments,” said Shin Jang-sup, economics professor at the National University of Singapore.

“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 the target of the government's attack.”

The experts also recommend Moon push for reform in the labor sector to improve productivity in line with his inclusive growth measures, such as minimum wage hikes.

“Hiking the minimum wage can often depress employment growth and in turn lift unemployment, because firms suddenly face higher costs without a parallel lift in productivity,” said Katrina Ell, economist at Moody's Analytics.

“This is likely at play in South Korea, particularly for smaller to medium-size firms which can be more sensitive to changes in minimum wage rates.”