Small businesses in Korea have been hit hard by the Moon administration increasing the minimum wage. Photo: iStock
Small businesses in Korea have been hit hard by the Moon administration increasing the minimum wage. Photo: iStock

Storekeeper Lee Jong-won, 35 once dreamed of owning a chain of convenience stores in Ilsan, a pleasant, middle-class dormitory town on the outskirts of Seoul. Those dreams are now shattered.

Retail is highly competitive, with tight margins, and Lee was in one of the most competitive sub-sectors: 24-hour convenience stores. Clearly, no entrepreneur can work 24 hours per day, so Lee relied upon part-time workers to fill the gaps.

That was until the Moon Jae-in government raised the national minimum wage by 16% this year.

“There was no way I could continue to hire part-time workers, I would not have been able to break even,” Lee told The Asia Times. “After months toiling away with my income dwindling and the brutal hours taking a toll on my health, I had no choice but to close shop.”

Lee is one of the lucky ones. His dream may be over but life goes on. Aged 35 and with marketable skills, he is currently pursuing work in education.

But for many South Koreans, small business – shops, restaurants, bars, coffee shops, private education institutes – are their retirement plan. And for many owners of small enterprises, recent policy has been disastrous.

“Other people – those who are older, part retirement age, those who have no marketable skills – those people are lost,” Lee said. “I know people who went out of business and are now drowning themselves in soju [alcohol].”

Economic policymakers shown the door

Lee – and other small business owners – may take some satisfaction in the fact that South Korean President Moon Jae-in signaled a policy shift in decisive fashion today by sacking the two top members of his economic team.

Finance Minister Kim Dong-yeon and chief of staff for policy Jang Ha-sung were both given the boot. Hong Nam-ki, a veteran economic technocrat comes in as new finance minister, while senior social affairs secretary Kim Soo-hyun succeeds Jang.

Jang, a Wharton-trained academic, had been best known as a champion of minority shareholders rights before joining the Blue House. He had been the main figure behind Moon’s flagship “income-led growth” policy. It was reportedly the failure of Kim and Jang to reconcile their differences over the highly controversial policy that led to both men being shown the door by Moon.

The sackings had been widely anticipated, as the administration is increasingly facing a double whammy of economy-related pressures.

Economic failures on macro, micro fronts

On the macro front, Moon’s leftist Democratic Party, which does not have a majority in parliament, faces opposition criticism for South Korea’s falling growth numbers. In October, the Bank of Korea cut its GDP growth forecast for 2018 from 2.9% to 2.7%, a forecast which is a significant drop from the 3.1% achieved in 2017.

And on the micro front, Koreans are increasingly unhappy with the failure of Seoul to create new jobs. In the third quarter, unemployment rose 0.4 percentage points to 3.8%, with youth joblessness at 9.4%, its highest rate since 1999.

Moon is known as a nice-guy politician whose approval ratings are hovering around the 60% mark and who has won considerable local and international kudos for his handling of North Korea, and related Northeast Asian strategic issues.

However, he is despised by conservatives for his liberal ideology, and in a harshly unforgiving political environment – both Moon’s presidential predecessors are in jail serving lengthy terms – it could be the economy that will prove to be his Achilles heel.

One of Moon’s key electoral promises was job creation. But as the numbers indicate, he is not delivering.

Economic policy-makers are faced with two unpalatable trends affecting the giant conglomerates which dominate the economy. As they go global and seek to upgrade shareholder value, the blue chips are automating and offshoring, leading to a fall in new domestic jobs in manufacturing, traditionally Korea’s core competency.

That leaves South Korea’s service sector as a job growth generator. However, with the national infrastructure already built in, and with the country’s falling demographic hitting apartment construction, jobs in construction are drying up. And the other key service sector, retail, has also been hurt by government policies.

“The number of infrastructure and commercial projects, in general, has reached an all-time low, so employment has been hemorrhaging in the construction sector,” said Hank Morris, an adviser to Erudite Risk in Seoul. “Increases in minimum wages have hammered the retail sector, but SMEs have not been offered any tax breaks of any consequence, so they have had little incentive to hire – quite the reverse, they have incentives to downsize.”

Small businesses in the firing line

“Income-led growth,” as championed by ex-policy chief Jang, was set to deliver a hefty 54% hike in the minimum wage during Moon’s five-year term. But that was always going to be a high-risk policy.

The OECD warned in May: “The higher minimum wage could lead to a faster increase in private consumption to the extent that it is enforced, but it could also slow employment growth and weaken Korea’s competitiveness if not accompanied by productivity gains.”

But while productivity gains have risen slightly, Korea still ranks 17th out of 22 nations in the OECD.  In July, the Federation of Korean Industries complained that wage raises that exceed productivity hikes will undermine the competitiveness of businesses. The Korea Federation of Micro Enterprises added: “Small-business owners are at crossroads where they cannot help but choose either business shutdowns or staff cuts.”

And there is more. Business owners have faced not just soaring wages – 16.4% this year, and 10.9% scheduled for next year – but also a cap on working hours, which were reduced from 68 to 52 per week.

It is not yet clear where Moon’s new policy team will attempt to take the Korean economy as they step into the newly vacated shoes. But for those who have already suffered the fallout, there is bitterness toward what they see as ideologically driven policies that have already done too much damage.

“There are many reasons a business fails, but when the government makes things more difficult by using the law, can people be blamed if they feel anger?” asked former store-owner Lee.

“Government authorities may think they their policies are meant to help, but they do not, they are driven by an ideology that doesn’t care for the realities on the ground. For that, I cannot and will not forgive them.”

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