Stronger leadership needed for ’15 economy

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Stronger leadership needed for ’15 economy


The second half of 2014 was a trying time for Choi Kyung-hwan, who took on the dual role of finance minister and deputy prime minister for the economy in July.

Demonstrating his grasp on the market was especially challenging despite the fact that his leadership qualities proved strong at home and abroad. His economic stimulus package was even bold enough to be coined “Choinomics,” an apt rival to Japan’s Abenomics.


The three-term lawmaker and his longtime ally President Park Geun-hye appeared to be on the same page regarding economic policies, but as low growth became the new normal for the Korean economy, Choinomics - comprised of expansionary fiscal measures - seemed to stop short.

Fiscal injections, interest rate cuts and bold deregulations for the past six months did little to stimulate a sagging economy, and those measures only ended up aggravating the fiscal balance, the country’s surging household debt and the pessimistic consumer and business sentiment.


Consequently, Korea faces a new crisis in 2015, with the possibility that worsening confidence about the economy could push the country into a vicious cycle of deflation.

Although Choi’s economic team received high scores for its initial leadership, it received poor marks on tangible achievement.

According to a survey last year by the Institute for Future of the State of more than 1,000 Koreans in their 30s and 40s, nearly 73 percent believed Choi’s economic team was doing a poor job of steering the country’s economy.

“This is what young economic players think about in terms of the current economic situation,” the institute said. “It reflects the costly housing problem, sluggish business investment and negative consumer sentiment altogether.”

Hoping to hit a growth target of 3.8 percent this year, the government has proposed structural reform as the primary theme of its economic policies for 2015. The structural reform plan announced on Dec. 22 includes overhauling the labor market, the public pension system, the education system and the financial market.

Unlike the fiscal measures and deregulatory moves that the government unilaterally made, structural reform entails social compromise and mutual trust between the government and related parties.

In that sense, it’s likely the finance minister has the German Hartz concept in mind - named after Peter Hartz, the head of the government reform commission - which he used as a benchmark when he first mentioned reform.

In 2003, after Germany’s economic growth fell below 1 percent, Gerhard Schroder, the former German chancellor, cut back on excessive welfare benefits, simplified a complicated tax system, introduced part-time jobs and eliminated bureaucratic regulations, despite early opposition from workers. Five years later, the reform plan created more than one million jobs and Germany’s employment rate surpassed 70 percent.

“What Schroder did was reach a social compromise in order to solve low productivity problems triggered by excessive welfare,” Yoon Jeung-hyun, a former finance minister, said in a recent interview with local media. “Although the reforms resulted in a change in the power structure, Schroder’s determination led the German economy toward revival. Our society also needs Schroder’s leadership.”

Resolve to reform

Choi is not alone is calling for an overhaul. Government ministers in other economy-related branches have also shown strong resolve to make the reform plans a success and pledged in their New Year’s addresses to carry out the planned structural reforms.

Choi called for patience in enduring structural reform in order to establish a growth framework for the next 30 years.

“A rigid dual-labor market, inefficiency in the public sector, the textbook-based education system and selfishness in the financial industry have become deep-rooted evils of our society, becoming a major drag on our economy,” the minister said.

“We have been putting off resolving these problems because of fear of conflict, even though we recognize them. But reforming those evils has become the mission of our time.”

He added, “Along with reforms in the public sector, labor market, education system and financial sector, the government will maintain its efforts to stimulate the economy, and help struggling young people, female workers, senior citizens, the self-employed, small enterprises and merchants.”

The minister carefully forecast that the Korean economy was expected to see a gradual improvement, but noted that there are a number of external uncertainties, such as the U.S. interest rate hike, the low Japanese yen and falling oil prices. There are also internal risks: household debt and undermined competition in the manufacturing sector.

Shin Je-yoon, chairman of the Financial Services Commission, said the financial authority will come up with a second series of market-friendly deregulations for the financial industry and, as early as January, a plan to establish infrastructure that is friendly to “fintech” - a new field that refers to technology that is applied to financial services, such as payment made via smart devices.

Employment Minister Lee Ki-kweon promised all-out labor market reform, focusing on narrowing the gap between working conditions for regular and irregular workers.

“There should be more people who have decent jobs and can work until 60 without discrimination,” Lee said. “By putting our heads together, the government, labor and management will try to build a new ecosystem that can ensure jobs for future generations.”

Land Minister Suh Seoung-hwan promised that his ministry will be a government leader in terms of lifting old regulations, which will imbue some life into the sagging economy.

“There will never be a stop in regulatory reform,” he said. “Consistent government reform will help private economic players make investments and bring a virtuous cycle to the economy.”

Lee Ju-yeol, the governor of the Bank of Korea, emphasized the need for structural reform before the government shifted its focus from fiscal measures to structural reform.

Lee also highlighted in his New Year’s address that the central bank will find its role to assist government-led reforms.

“As the central bank, we will contemplate our role and policy tools to help make the government plan successful,” Lee said. “Sharply increased household debt doesn’t need not be emphasized anymore. It strains consumer spending and could potentially put the financial system at risk.”

A want for reform

The main focus of the government’s plan to reform the labor market is to improve conditions for irregular workers by raising the minimum wage and easing contract terms.

Contract workers have become a priority in the structural reforms the government has been pushing to secure stronger economic growth.

Statistics Korea data shows that there are 6.1 million temporary workers in the country, currently accounting for 32.4 percent of the total work force. That number shot up from around 3.6 million in 2001.

The average monthly wage for temporary workers is 60 percent of that of salaried workers, a severe inequality. While regular workers got a 2.3 percent average increase in their annual incomes this year, irregular workers saw a mere 1.8 percent rise.

Under the government’s proposals, any contract worker 35 or older will be guaranteed a job for a maximum of four years. The current law only guarantees contract workers their jobs for two years.

In addition, contract workers will be able to receive severance pay if they work at a company for more than three months. Under existing law, severance pay is only given to irregular workers who have been with the company for at least a year. If a contract worker is let go after the four-year guarantee, he or she receives severance as well as an additional payment to aid during the job search.

The government wanted to pair the new regulations on contract workers in the way that salaried workers are paid, which it considers overly protective. Instead of automatic raises reflecting years of service, workers would get raises based on performance.

Compromise, trust needed

Among others things, the labor market reform plan is expected to generate conflicts of interest among various groups.

Already, the plan to extend working guarantees for contract workers for four years has come under fire from both unions and companies. Despite an agreement on Dec. 23 by representatives of the labor sector, businesses and the government on efforts to improve Korea’s labor market, the three parties remain far apart on the terms of the plan.

Experts predict that labor market reform will be a dominant economic issue in 2015.

And although they largely agree with the government that the problem cannot be put off anymore, many are concerned about expected backlash from different groups.

“Public-sector reform should be carried out before the labor market is touched,” said Shin Se-don, an economics professor at Sookmyung University. “Forcing flexibility in the labor market will trigger social backlash. The problem with today’s economy is not with regular workers.”

After the government announced the reform plan, two handwritten posters were hung on a bulletin board on Dec. 30 at Kyung Hee University in Seoul. The posters scolded Finance Minister Choi and gave him an F for his economic policies. Similar posters were stuck on boards at Yonsei University, Korea University and Sungkyunkwan University.

“Minister Choi’s policy is to produce more irregular workers rather than resolve the problem,” said Choi Hwi-yeop, 24, a student at Kyung Hee University who wrote the posters.

In fact, the government’s reform plan has already faced backlash from young Koreans struggling to find jobs.

“The government’s attempt to switch its focus to structural reforms for employment flexibility while keeping an expansionary policy is viewed positively,” said Kim Jung-sik, an economics professor at Yonsei University.

“But structural reforms should take place gradually, starting in areas that matter the most.”

Still, some are concerned about the adverse economic effects of mending a less-than-perfect labor market. “Flexibility is necessary in expanding overall employment,” said Lee Geun-tae, a research fellow at the LG Economic Research Institute. “But it can be negative to boosting domestic demand, so the government should be careful.”


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