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Finding economic growth in South Korea

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South Korean President Moon Jae-in and his wife Kim Jung-sook wave national flags during a ceremony to mark the 74th anniversary of Korea's liberation from Japan's 1910-45 rule, Choenan, South Korea, 15 August 2019 (Photo: Reuters/Jung Yeon-je).

In Brief

South Korea experienced low GDP growth in 2019, recording only 1.7 per cent in the second quarter and 2 per cent in the third quarter. The low growth rate does not necessarily indicate that the economy is heading in the wrong direction, but designing and implementing effective economic policy in a period of low growth is certainly more difficult.


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President Moon Jae-in’s administration advocates for a ‘people-centred economy’ and improved ‘quality of life’. While there is some consensus on this direction of economic policy, these policies require a complex formula when the economy is slow. They aim to make everyone’s lives better but it is hard to promise a bigger piece for everyone when the pie stays the same size. The government must find ways to gain support and understanding from groups negatively affected by the policy and achieve social integration.

Labour market dualisation is a chronic problem in South Korea. The main issues are wage gaps — both between large companies and SMEs and between regular and non-regular workers. Workers doing the same task can be paid differently depending on the size of the firm and their worker status. While these differences are rather natural from an economics point of view, the government is taking it seriously and working towards a resolution.

This includes converting non-regular workers into regular workers in public institutions, which was promoted from the beginning of Moon’s regime. The policy has been the source of several conflicts and controversies as it was undertaken without social agreement to reduce the excessive benefits of regular workers. It has been criticised for raising hiring costs and discouraging firms from hiring new employees. Many argue that it would be ‘unjust’ to convert non-regular workers into regular workers almost unconditionally, particularly where people had to pass an exam to become a regular worker.

In addition to enhancing job security, the government advocates reducing working hours to improve quality of life — South Korea currently has the second longest working hours among OECD countries. The government has amended the law to reduce the maximum working hours from 68 to 52. This is for the ‘work-life balance’ that South Korea sorely needs.

Yet there is a concern that various issues with the policy change have not been seriously addressed — how tasks should be divided among workers to make sure job is done, what kinds of tasks can be divided among workers in the first place, and how the policy would affect employment. It is particularly complicated in South Korea because lay-offs are difficult and the labour market is inflexible. Excessive enforcement without adequate consideration of industry-specific differences and practical details will not effectively reduce working hours and only increase unpaid, shadow-working hours.

Aside from labour policy, the government is eager to find new growth engines. But conflicts between interest groups tend to stall the growth of sprouting new markets. The recent debacle surrounding Tada — a South Korean ride hailing service — seems to illustrate this well. The ride hailing service is a successful business in the gig economy that has been growing globally. But it has been contained in a legal grey area for years in South Korea.

In response to fierce backlash from taxi drivers, the government is moving towards effectively banning ride hailing services. The government is trying to find new growth engines but is also simultaneously protecting the incumbent industries. New technologies are often disruptive and the government is not more informed than market participants, particularly when it comes to new industries. In this case, the role of government should be to let the market function and monitor any market imperfections.

In 2020, the prospects of South Korea’s economy are not exactly full of hope, plagued by problems such as an ageing economy and low fertility. There is also contemporary external environmental instability, including the US–China trade conflict and economic conflict with Japan. This tumultuous environment further complicates the formulation of economic policy.

The government has greatly increased public expenditure to support growth rates. But, if the current fiscal spending and sluggish growth continue, it will lead to greater increases in the tax burden and is unlikely to be sustainable in the long term. Rather, it may be more appropriate to allow the market to innovate and grow, and believe that market participants can actively improve the market. The government’s efforts to secure the people-centred economy will need to be focussed on understanding and coordinating interests.

Hwa Ryung Lee is Fellow at the Department of Competition Policy, Korea Development Institute (KDI).

This article is part of an EAF special feature series on 2019 in review and the year ahead.

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