Income-led growth drive at crossroads

Moon urged to create ecosystem to bolster private sector

By Park Hyong-ki

When President Moon Jae-in took office two years ago, he showed a stronger commitment than all his predecessors to tackle income inequality and unfavorable work conditions.

His administration immediately carried out his key income-led growth policy, backing rapid rises in the country's minimum wage. This was increased by 16.4 percent in 2018, and 10.9 percent this year.

Moon also pushed to legally enforce the 52-hour workweek system, given Koreans worked the third-longest hours per week after Mexicans and Costa Ricans.

Also, inequality measured by the Gini coefficient stands at 0.355, which is above the OECD average of 0.317. A figure closer to 1 means a country has maximal inequality.

"We need to give the President credit for showing the strongest commitment to reducing inequality and improving our working conditions among all administrations," said Hong Sung-guk, an independent economist.

Four other foreign and domestic economists agreed with Hong.

They said Moon kicked off his administration with the very best of intentions based on the fact that trickle-down economics led by the private sector has been repeatedly shown to have failed.

Well-intended but unproductive

But his good intentions did not produce the positive outcome he hoped for, beset further by external downside risks to the economy.

"It was well-intended. However, sharp increases in the minimum wage acted as a deterrent to private sector hiring, which then contributed to rising unemployment," said Rajiv Biswas, chief economist at IHS Markit Asia in Singapore.

The negative factors beginning with Moon's "well-intended" wage policy accumulated, resulting in a GDP contraction of 0.3 percent in the first quarter of this year.

"They weren't the best policies to achieve growth. Then, we had the U.S.-China trade war, the hawkish U.S. Federal Reserve last year, and China's rapid deceleration," said Alicia Garcia-Herrero, chief economist at Natixis Asia in Hong Kong.

Both Hong and KB Securities economist Kim Doo-un said the President should have gotten the private sector more involved to improve working conditions and inequality, despite the failure of trickle-down economics.

"The lesson is that we cannot fix inequality without growth in the private sector. We should get every market player involved to simultaneously improve labor, boost output and pursue structural reform," Hong said.

Kim said, "By all means, Koreans needed a much-needed break from working long hours. But now, we face slow output," citing declining private investment and confidence.

Besides internal odds weighing on the economy, they said the U.S.-China trade conflict remains the biggest external risk, regardless of whether the two sides settle their dispute and reach an agreement this week.

This is because of the unpredictable nature of the United States and China.

"Given the danger that the U.S.-China trade war could again escalate, Korea remains vulnerable to further shocks to its exports, which have already been hit by weaker demand in China and a slowdown in global electronics orders," Biswas said.

With weakening semiconductors and global trade protectionism, Yoon Chang-yong, chief economist at Shinhan Investment, said, "Korea will barely be able to grow above 2 percent this year."

His view comes in spite of the government's 6.7 trillion won ($5.8 billion) supplementary budget aimed at rebuilding fire-scarred areas in Gangwon Province and supporting small- and medium-sized enterprises.

A new hope

Despite headwinds clouding the future prospects of the economy, they said there is a silver lining.

President Moon's economic team has signaled a change in its policy to boost innovation in the private sector, as well as support fair competition and achieve inclusive growth.

It seeks to help develop and foster 10 unicorn startups valued at more than $1 billion every year in an effort to create new industries and new jobs.

The economists say the country can use its strength in fifth-generation (5G) telecommunications networks integrated with artificial intelligence (AI) and big data to build a smart city ecosystem.

"The government can encourage young entrepreneurs to create an ecosystem in this area. There are lots of business opportunities in developing countries," Biswas said.

There are eight unicorn startups as of April this year, according to the Ministry of Economy and Finance.

The ministry said it seeks to support startups in financial technology, AI, big data, clean energy and smart factory automation, while backing big companies such as Samsung Electronics in developing non-memory chips.

Also, one of the most important positive achievements during President Moon's first two years was restarting talks with North Korea and reducing military tensions here, the economists say.

This has reduced geopolitical risks.

"Things should get better for South Korea with North Korea, the United States and China engaged," Garcia-Herrero said.