Jobs and welfareIn her New Year’s address, President Park Geun-hye pledged to introduce a three-year outline to transform and innovate the economy. Her announcement indicated a revival of the government’s planning function for the economy, which has been dead for the last two decades after the Ministry of Planning and Strategy was incorporated into the Ministry of Finance and other economy-related ministries in 1994.
It is a meaningful step because it suggests the government was admitting to walking away from the general belief held for the last 20 years that the economy would run best after it was liberalized and left entirely up to the market.
South Korea’s economy lost its galloping pace after it was hit by the Asian financial crisis in 1997. The liquidity, debt and foreign exchange crisis - and the international bailout that followed - showed that a major fix was required to the state-planned and public-led economic model. Korea shifted to aggressively open up, privatize and deregulate.
But that transformation came at the cost of slower economic growth. The practice of mapping out an economic development blueprint and renewing it every five years, which we did since 1962, was scrapped during President Kim Young-sam’s term. During those years, gross domestic product and per capita income grew over 6 percent on average. The rate of growth eased to around 4 percent for seven to eight years after the financial crisis. Over the last six to seven years, the pace slipped to the 2 percent range.
It is natural for growth to slow down in a mature economy. But a growth rate being cut in half cannot be deemed natural. The sudden and excessive liberalization of the capital market following the 1997 financial crisis precluded long-term investments by local companies. The abolishment of government economic planning and policy making for the industrial sector slowed investment in new industries.
Slowed growth was not the only fallout from the financial crisis. Employment became unstable. The share of the country’s nonregular work force in the job sector, which has never been low, is now the highest among countries of the Organization for Economic Cooperation and Development. Salaried employees also no longer feel secure about their jobs. The severe competition to get into medical schools among college applicants - more severe than anywhere else in the world - started after the financial crisis. It shows the extent of job insecurity in the country. Young people, especially the very smart ones, choose the safest and best-paying profession for their careers regardless of their real passions or dreams.
An inadequate social security system aggravated fears of being out of a job. South Korea’s spending on welfare is about 10 percent of its GDP, the lowest except for Mexico among the OECD countries. Welfare expenditures by the United States - where people complain about weak social security - take up 20 percent of the GDP.
With insecure jobs and meager subsidies for day care and education, Korean couples hesitate to have babies, pushing our birth rate down. Because unemployment insurance and pension plans are hardly enough, people are left in the lurch when they lose their jobs or retire. Since the financial crisis, suicide rates among middle-aged and senior citizens rose sharply. The suicide rate that was 12 to 100,000 people until 1995 - below the OECD average of 16 - is now 33, the world’s highest level.
If job security doesn’t improve welfare, the country will become one of the worst places to live with the world’s highest suicide rate and lowest birth rate. Job stability and better welfare will also help speed up economic growth.
In the short run, if the government offers policies to enhance job security and extends welfare benefits to ensure minimum living expenses, the low-income class will be able to join in economic activities, helping to increase consumer spending and domestic demand, which would translate into economic growth.
In the long run, established social security and various rehiring and retraining programs will motivate workers in their jobs and stimulate economic activities. Young people will no longer need to compete so fiercely to get famously stable jobs, which they may not even want. Workers will no longer have to resort to extreme or violent actions to resist layoffs and restructuring. The corporate sector will be encouraged to develop and invest in new fields. Restructuring will become easier and faster, accelerating our growth pace because the economy will be more flexible.
The best prescription that can revive and drive the Korean economy would be job security and enhanced welfare.
Translation by the Korea JoongAng Daily staff.
*The author is a professor of economics at the University of Cambridge.
by Chang Ha-joon