'J-nomics' at a crossroads

By Choi Sung-jin

As recently as the June 13 local elections, President Moon Jae-in's approval rating soared to 80 percent. Less than two months since, the figure is barely over 60 percent, hitting its lowest since he took office 18 months ago.

The slower-than-expected progress in North Korea's denuclearization is not the main reason for Moon's plummeting popularity. It's the economy, stupid ― as always.

Korea's economic growth rate slowed to 0.7 percent in the second quarter of the year, down from 1 percent in the first quarter. Year-on-year, the quarterly growth rate of gross domestic product (GDP) was 2.9 percent. During the same period, the U.S. economy expanded 4.1 percent.

The reversal of the economic growth rate between Korea and the U.S. ― whose economy is 12 times larger than Korea's ― came as a shock not only to economic policymakers but also to private economists. Moon should think himself lucky because his approval rating is 1.5 times that of Donald Trump, although U.S. GDP increased nearly 1.5 times more than Korea's.

Moon and his economic team are now sandwiched between reform-minded progressives and growth-oriented conservatives.

Industry lobbies and pro-business economists mainly target Moon's labor-oriented economic policy. It calls for, among other things, increasing the minimum wage to 10,000 won ($8.90) an hour by 2020 to give people some dignity, and shortening the work week to 52 hours to help wage earners reduce stress from the nation's notoriously long working hours and consume more.

These materialize the “Put People First” slogan of Moon's economic policy, dubbed “J-nomics.” In theory, the income (wage)-led growth policy aims to create a virtuous cycle of higher income, increased consumption, more investments and economic recovery. In reality, however, the policy failed to take two things into account.

First, it overlooked the 6.38 million “non-wage-earning laborers,” i.e., self-employed people who account for 25 percent of total workers, more than twice the 12 percent in advanced countries. For them, a higher minimum wage means worsening profitability, or deficit operation in the worst scenario.

Korea's small and medium enterprises (SMEs), which account for over 90 percent of the total number of corporate entities, are also threatening to shut down, unable to meet rising labor costs. The government should have worked out measures to offset increased labor costs by reducing store rents and franchise fees for them ― but did not.

Second, a higher minimum wage alone does not lead low-income, debt-ridden families to spend more, as they use increased income to repay debt and interest. Policymakers should supplement it by enhancing social safety nets, including earned income tax credit (EITC).

The lesson from the ongoing fiasco: Good intentions do not always lead to the intended outcome ― unless they are thoroughly thought out to prevent adverse effects. Conservatives say the paternalistic policy has made low-income families' lives even harder. Citing the example of the U.S. and Japan, they are forcing Seoul also to shift to a “business-first” policy.

On the other side of the critical camps are progressives, who criticize the Moon administration for not being reformist enough. They call for taming family-controlled conglomerates called chaebol, curbing and breaking up their economic power to let SMEs grow.

These progressives have rebuked Moon over his recent meeting with Samsung Group's de facto leader Lee Jae-yong for abandoning economic reforms. The critics also spoke ill of Moon's emphasis on deregulation, saying it is regressing to the pro-chaebol policy of the two previous conservative governments.

Unless the Moon administration reforms the economy in its first two years, they say, it will follow the footsteps of two liberal administrations under former presidents Kim Dae-jung and Roh Moo-hyun, which yielded to tycoons and bureaucrats later.

Korea is yet to decide which economic path it should follow ― between the market-is-everything U.S. model encouraging unlimited competition and the North European model of capitalism tinged with socialistic egalitarianism. It's as if the nation needs to hold a national referendum to decide its economic model.

Even if it does, the world's 11th-largest economy is still “too small” to chart its course independently. Unlike the U.S. and Japan, Korea has neither the vast domestic market nor one of the world's key currencies. It remains a small, open economy vulnerable to changes in global trends. Moreover, the global economy is too closely interconnected for one country to go its own way.

All this does not leave the Moon administration many options.

Above all, it should not make haste or be overly ambitious. The former Kim Dae-jung administration vowed to get over the 1997 Asian financial crisis in just two years. In 2000, the Kim administration loudly celebrated Korea's repayment of bailout loans to the International Monetary Fund.

However, the hurried process left too many aftereffects, such as the sellout of Korean companies and banks at dirt-cheap prices, numerous unemployed people, suicides and a “credit card” crisis during the succeeding Roh administration as a result of boosting domestic consumption too hastily.

Kim's ambition to “graduate” the IMF regime and put Korea back on a growth track within his term has left huge ill effects, some of which remain.

Likewise, Moon has to remain content with setting the foundation for stopping the widening economic inequality, not trying to solve the matter entirely before he leaves office. He must try to maintain corporate vitality and, at the same time, take care of the working poor's livelihood.

Also, the nation's political and economic leaders should not turn the economic policymaking into a zero-sum game to maximize their partisan political interests. As far as the economy is concerned, the Moon administration should have both growth-first ministers and redistribution experts in its team.

The past two decades or so showed neither side can make the economy grow or people happier by itself.

Choi Sung-jin is a Korea Times columnist. Contact him at choisj1955@naver.com.