[Viewpoint] Small business and Korea’s future

It has been confirmed once again that small business owners are the most severely hit by the global economic crisis.

According to the recent report by the National Statistical Office, the total number of newly employed workers during the second quarter of this year has dropped by 134,000 from that of the same period last year. During the same quarter this year, the number of small business owners, including family members who are working for them without salary, has plummeted by 309,000 from that of the same period last year.

The statistics also showed that the number of regular employees has gone up, while the number of temporary workers has gone down by some 140,000. The report shows that the employment restructuring prompted by the economic crisis is concentrated on the non-regular workers and small business owners. The issues associated with the non-regular workers, at least, are discussed as a national policy. In contrast, small business owners are left vulnerable by a blind spot in government policies.

Even before the economic crisis, the number of owners of small businesses was steadily decreasing. A decade ago, small business owners employed 38 percent of those with jobs in Korea. As of the middle of last year, the number was down to 31 percent. This is the result of the rapid globalization since the Asian foreign exchange crisis in the late 1990s, after which discount stores and large retail chains began to appear in Korea and the mom-and-pop stores in residential neighborhoods began to disappear.

It’s true that Korea’s ratio of those working at small businesses is higher than that of other member countries of the Organization for Economic Cooperation and Development, which have about a 10 percent ratio. Korea’s comparatively high rate is a result of the high competitiveness of the country’s manufacturing industry.

Since the early days of industrialization, manufacturing companies have needed to improve their technologies and maintain high rates of production to compete against foreign companies. Sometimes, increased productivity resulted in fewer workers.

Workers overflowing from manufacturing should have been absorbed by the service industry, but this did not always happen exactly as all would have liked.

In the end, some of the massive manpower discharged from the manufacturing industry failed to join the modernized service industry. Since those left out needed to find other job opportunities, the country has an unusually large number of self-employed small business owners.

It is inevitable that small businesses must restructure. The changes, however, should be gradual. A rapid collapse is never desirable. Because the imbalanced situation is the result of the nation’s economic growth and the society’s structural problems, a policy to specially address the matter is necessary.

Korea’s small businesses have long been disregarded in policy-making and it was only in the last decade that the service industry became the subject of economic policy decisions. It is also important to remember that small businesses have played an important role in complementing the poor social safety net revealed in the aftermath of the foreign exchange crisis.

In order to solve the fundamental societal problem linked to uneven distribution of wealth and the reduction of the middle class, it is necessary to protect non-regular workers and prevent the collapse of small businesses. When the problem of wealth distribution reaches unmanageable levels, the goal of social integration will never be achieved and the nation’s growth potential will be weakened.

Small businesses are closely linked to the important socioeconomic issues of improving the competitiveness of the service industry and mending the social divide. Therefore, it is urgent to create a long-term, systemic measure to deal with the situation. The current stop-gap, reactionary policy of subsidizing employment and providing financial assistance to small business owners is not enough.

Instead, the issue should be approached with the view of developing a new growth engine. Modernizing business conditions of the conventional service industry will largely increase productivity.

The number of self-employed in the transportation, communications, finance and public service sectors is rapidly increasing, and there are many ways to improve this growth in such industries.

Many advanced nations have strengthened their economic levels through development of the service industry, and their successful cases demonstrate a lesson to be learned.

The door is always open for Korea to transform small businesses into the most dynamic engine of the country’s economy.

*The writer is a senior economist at the Institute for Monetary and Economic Research of the Bank of Korea.

by Kim Hyun-jeong