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Moon’s income-led growth divides gov’t and industry

Oct 17,2017
Five months into his presidency, President Moon Jae-in’s rapid-fire reversal of his conservative predecessors’ economic legacy is triggering a contentious debate about the country’s future growth model as Korea faces a multitude of challenges including low growth, an aging population and high youth unemployment.

A large part of the public seems to hold an optimistic view of the left-leaning economic policies aimed at spreading wealth from the rich and big corporations to increase the income of the average household.

But critics - especially big corporations and some mainstream economists - say that the approach doesn’t give corporations the freedom to engage in innovation and investment and lacks sustainability due to its heavy dependence on fiscal stimulus.

Income-led growth

The cornerstone of President Moon’s initiatives is the notion of income-led growth, which will attempt to spur economic growth and corporate investment by boosting household income and the demand generated by greater spending power. To achieve this goal, the administration has announced big changes in tax, minimum wage and corporate regulations.

The key measures include raising corporate tax rates and the minimum wage, a tougher oversight system for large corporations and job creation through public sector hiring and encouraging companies to hire more young people.

Moon’s initiatives, however, are seen as an obstacle by some corporate players and mom-and-pop store owners.

Most of the policies - such as the increase in corporate tax rates, lower tax benefits on R&D investments and minimum wage hike -all immediately translate into additional costs, they say.

Park Yong-maan, who doubles as the chief of the Korea Chamber of Commerce and Industry and Chairman of Doosan Group, expressed concerns about Moon’s policy direction, suggesting that the government has not taken into account the current business environment. The Korea Chamber of Commerce and Industry is the oldest major business organization in Korea.

“The government’s policy should be more than well-meaning rhetoric or declaration,” he said in July. “The government should take into account the reality facing companies,” he said.

Some academics also voiced skeptical views.

At a forum held by Seoul National University last month, the university’s economics professors Kim Young-sik and Kim Se-jik questioned the feasibility of income-led growth. “The assumption that increased purchasing power will lead to more investment is not tested and unreliable,” said Kim Young-sik.

Industry players echoed the sentiment, saying that they feel pressured to follow through with Moon’s demands and changing policies.

In line with its focus on job creation, the government asked the country’s 30 largest companies and major banks to expand recruitment for the next five years.

The country’s commercial banks, including Woori Bank and KB Kookmin Bank, almost doubled their recruitment this year compared to the previous year at a time when the dependence on online and mobile banking increasingly negates the need for the branch network.

Minimum wage hike

Another major policy is to hike the minimum wage up to 10,000 won ($8.80) by 2020. It is currently 6,470 won.

While workers cheered the move, employers of small businesses say that the increase is excessive.

More than 10 organizations that represent self-employed businessmen and small and medium-sized merchants took to the streets in July to protest the government’s decision to push the minimum hourly wage up. They said that the rate of the increase is too steep to sustain their business.

As part of the effort to hit the target by 2020, the minimum wage in 2018 has been increased by 16.4 percent to 7,530 won, the biggest increase ever.

“The government raised the minimum wage on an unprecedented scale for 2018,” the Korea Federation of Micro Enterprise said in a statement.

“Labor costs are a large part of the costs of a small and medium business, so the business’ overall profits will decline,” the association that represents smaller merchants said.

Apparently acknowledging such criticisms, Moon recently advocated the importance of innovation and support for promising high-tech startups.

He said that the government will introduce the so-called regulatory sandbox to allow startups to test tech-based products, services and business model in the real market without following legal procedures.

Populist policies

Despite criticism in the business circle, the major proponent of Moon’s policy is the public, who have long been disenchanted by the collusion between political heavyweights and chaebol groups.

In a survey by Economic Research Reform Research Institute, a private think tank, 64.8 percent of the respondents said that chaebol reform is indispensable for economic growth. When asked to grade the new government’s reform policies between A and F, A being the highest, 22.4 percent chose A. Another 33.2 percent selected B while 23.5 percent said C.

The think tank noted that the assessment is more favorable than that of the Park Geun-hye administration, with positive ratings - A or B - at 55.6 percent for Moon’s government compared to 47.4 percent for Park. Both surveys were taken within the first two months of the two administrations.

The positive public sentiment is also reflected in Moon’s general approval rating, which reached nearly 70 percent in the latest survey.

Christine Lagarde, managing director of the International Monetary Fund, commended the government’s push to support marginalized groups in society such as seniors and young job seekers.

“Here in Korea, the Parliament recently approved a budget that includes transfers to the elderly, subsidies for job-seeking youth, and higher unemployment benefits,” she said while visiting Korea last month.

“A stronger social safety net - including a more reliable pension system - is also crucial for China, because it facilitates the transition to consumption-led growth.”

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]