[Viewpoint] A misguided economic strategy

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[Viewpoint] A misguided economic strategy

The conservative Lee Myung-bak government won public support at the beginning of its term with a pro-business attitude and an emphasis on economic growth. Now midway in its five-year term, the administration has veered toward a pro-working class stance in the name of promoting income equality.

Many are now confused about the administration’s ideological identity. Somewhere along the line, pro-enterprise began to mean anti-working class. An emphasis on wealth equality muted talk on the need for growth.

But what ordinary people are most concerned about is the availability of steady income jobs. In a market economy, wealth equality without growth is meaningless. Against this backdrop, the top economic priority should be placed on creating more jobs and generating growth. The government’s early pro-enterprise drive based on market principles was the best option to achieve these twin goals.

Economic growth is driven by productivity and labor. Unfortunately, our labor resources have reached their limit due to the demographic risks of an unprecedented low birth rate and rapidly aging society.

So our economy can only rely on stronger productivity to gain growth. Korea Inc. is desperately trying to maintain its edge against a China that has low-cost labor and a Japan backed by high-quality technology. Moreover, in the technology-based manufacturing industry, improvements in productivity generally mean the replacement or reduction of human workers with automation and rationalization. So in order to achieve both job and economic growth, we must focus on the service industry, which depends on human resources instead of the manufacturing sector to drive the economy.

According to a McKinsey report, more than 85 percent of gross domestic product in high-income countries over the last 25 years came from the service sector and the portion is getting bigger. The services sector takes up 80 percent of the economy in the U.S., 79 percent in Britain, and 73 percent in Japan. The share in our economy is 58 percent, one of the lowest among the members of the Organization of Economic Cooperation and Development.

We are in the lowest tier in the OECD club in terms of productivity in the services sector as well. The reasons reflect a lack of corporate interest. Korean companies invest in research and development as much as their multinational counterparts in advanced countries. Yet Korea’s spending on R&D in the services sector accounts for 7 percent of GDP, a paltry amount compared to the 25-or-so percent among the Group of Seven countries.

Second, unlike advanced countries, the local services industry is mostly led by small and mid-sized enterprises. SMEs account for 80 percent of local services production and 90 percent of employees in the sector. The industry is in desperate need of radical capital investment from cash-rich large enterprises.

As a part of efforts to balance wealth, the manufacturing sector has been trying to re-align relations between large and smaller companies from a top-down system to a horizontal one. But these efforts are neither efficient nor realistic given the global trend of outsourcing operations.

The exploitation and unfair treatment of smaller subcontractors by larger companies must be stopped, but the forced leveling of relations goes against market principles and simply won’t work. The gap in wealth can be narrowed through taxation to some extent, but the market economy generally favors scale and rewards the winners. Under these conditions, steady economic growth that generates new jobs is the only means to help ordinary working people.

From where we stand today, it is best that the government pursue sensible and feasible policies to create jobs and generate growth instead of coming up with anti-market measures under the banner cry of improving the lives of common people. Instead of obsessing with the manufacturing sector, the policy focus should shift to labor-intensive service industries such as the tourism, culture, welfare, hospitality, education, medical and IT fields.

The government should encourage large enterprises to invest aggressively in the sector to boost productivity. It must come up with a mechanism to promote a win-win situation between large and smaller companies to generate permanent jobs. We are blessed with a unique passion for education and a diligent workforce, which is best equipped to be a service powerhouse.

The Lee Myung-bak government may be able to find a solution to improve the lives of ordinary people by returning to its pro-enterprise mindset. Its role is to encourage large companies that have the capital to invest in the services sector to create jobs and foster an environment for co-development with smaller companies.

*The writer is a professor of business administration at Ewha Womans University. Translation by the JoongAng Daily staff.

by Park Hun-young
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