Tightening a belt - or a noose?

Samsung Electronics’ decision to institute a companywide salary freeze was met with sneers and disbelief. To the general public, the fact that it needed cost-cutting was a laugh. The company is not only the biggest in the country but the world’s largest memory chip and mobile phone maker with revenues of 206 trillion won ($183 billion) and operating profit of 25 trillion won last year.

But a sense of anxious urgency permeates the company. Revenue dropped 10 percent last year from the previous year and operating profit was down a painful 32 percent.

Last year’s performance was a blow to Samsung Electronics, which isn’t used to setbacks. Samsung Electronics is almost synonymous with Korea Inc. Korea was able to maintain trade above $1 trillion for the last four years and its trade surplus reached $47.4 billion in 2014. But how long it can keep up such robust trade is uncertain given the faltering performances of Korean companies.

If the nipping at their heels by Chinese companies was the only concern, companies could invest and stay ahead by honing their technological edge. But their real challenge comes from a broader context - a changing paradigm in the global economy.

The Korean economy has been driven by exports since the 1970s. Many countries depended on external trade in those days. But times have changed. Governments around the world today are entirely engrossed with domestic demand. Since the global financial meltdown in 2008, economic pundits have been advising countries to attend more to domestic demand to drive growth.

Japan has been using all fiscal and monetary means to boost its domestic demand. China is also navigating away from reliance on exports to pay more attention to domestic demand. According to studies of 208 United Nations member countries by LG Economic Research Institute, growth by export-led countries was higher than countries that relied on domestic demand from 1970 to 2007. But from 2008 to 2012, the situation was reversed. Average growth of export-led countries was 2.6 percent while that of domestic demand-led countries was 3.4 percent. Monetary authorities around the world are pumping out money to bolster liquidity and encourage capital investments in factories on their territories. American and Japanese companies have raised wages. It is still too early to say how well the strategy will work, but the world looks intent on seeing it through.

After being appointed deputy prime minister for the economy last year, Choi Kyung-hwan announced that he would try to revive domestic demand, taking an uncharted path if he had too. But the fact is that many countries were already on that path and way ahead of Korea. Recently Choi has been talking about the need for higher salaries. During a meeting with the heads of five economic organizations over the weekend, Choi floated that idea, although the corporate representatives responded with disapproval. In closed-door discussions, economic organization heads are said to have explained their disagreement to Choi, who mostly listened.

The argument from large companies has been always the same. Hikes in wages translate into new production costs and if Korean companies lose price competitiveness, they will inevitably have to lay off employees, which would end up hurting domestic demand. The argument stands because the local economy is still entirely oriented to external demand. Even a global company like Samsung Electronics has chosen austerity measures like a salary freeze because its profits shrunk from a slowdown in overseas demand.

The company’s position is understandable. Korean domestic demand is relatively small with a population of only 50 million. It cannot be compared with bigger markets like Japan and China. Domestic demand even during good times cannot replace exports in terms of generating revenue for companies. Domestic demand must be customized to meet different tastes. Large manufacturers - more used to mass production and sales overseas - cannot afford to produce many different products for highly specific groups of consumers.

I want to agree with the theory of growth coming from raised salaries. The Organization for Economic Cooperation and Development in a recent report warned that the widening income gap is undermining economic growth around the world. Narrowing the income gap has become a priority in economic policy. With countries more focused on developing their own markets, we cannot expect overseas demand to grow. The time has come for Korean companies to change their mindsets and adapt to a new economic paradigm.

But does the government understand where it must head? The way the deputy prime minister causally dropped a sensitive issue like salary hikes without building a strong case, failing completely to persuade anyone, suggests not.

How do the authorities expect to persuade companies to take a risk and sail into uncharted waters with such poor salesmanship? Instead of repeating textbook theory, the government must present a true vision for the economy.

JoongAng Ilbo, Mar. 18, page 30

*The author is an editorial writer of the JoongAng Ilbo.

by Yang Sunny