Deputy Prime Minister Choi Kyung-hwan has been raising concerns that the Korean economy is showing signs of depression, and the Bank of Korea agrees to some extent. The deputy prime minister in charge of economic affairs met with business organization leaders to persuade them to raise employees’ salaries to give some traction to economic recovery. To address the fear of depression, however, we must know exactly why the Korean economy has arrived at such a state. The governments of advanced economies like the United States, European Union and Japan have been fighting economic woes and fears of depression and deflation by printing money and pumping out liquidity on a massive scale. Economic slumps have become common around the world, another “new normal.”
Why is the global economy in such distress? The current woes can be traced back to the 1980s when the so-called New Economy or shareholders’ capitalism was born in a wave of financial liberalization. Investment banks that became the de facto owners of large companies sent their own people in as board directors and demanded management to boost share value. Corporate managers had to get rid of costly workers and property assets to bolster corporate earnings and thus share prices. This led to a stealthy increase in wealth inequalities. Shareholders and specialists in certain fields became wealthier while the main segment of society, its workers, were laid off or turned to contract-based jobs that offered few benefits and no security.
The 2008 subprime mortgage crisis that led to a global financial meltdown stemmed from a working class not being able to pay their mortgages due to layoffs and their reduced incomes. Widening income disparities in the New Economy dramatically undermined wages in the economy and took a toll on consumer spending, which accounts for the bulk of total demand. Businesses entered a slump as the result of poor demand, leading to even worse conditions for workers.
U.S. Federal Reserve Chairman Ben Bernanke saw such a structural trend and sought to reverse it through an unconventional monetary policy. He has tried to buttress growth by holding the target interest rate near zero and pushing forward unprecedented bond buying, which is known as quantitative easing. Japan followed the U.S. lead of all-out artificial stimuli. Incoming prime minister Shinzo Abe replaced the governor of the Bank of Japan with a veteran who could spearhead the monetary experiment of quantitative easing. The goal of an unlimited bond-purchase program was to galvanize domestic demand through increased liquidity and devaluation of the yen to aid export competitiveness of Japanese products. That would give Japanese companies profits, which they were supposed to use to increase wages for workers.
South Korea’s economy was hit hard by the reform program of the International Monetary Fund upon receiving an international bailout in 1997. Korean companies became dominated by foreign shareholders who overhauled corporate management structures to maximize profits and shareholders’ interests. As a result, employees lost jobs en masse or had to settle for contract-basis, non-salaried jobs. The Korean economy’s structure wasn’t geared to support domestic demand. What served as a double whammy resulted in a weaker yen. Because of similarities between the industrial structures of Korean and Japan, Korea suffered a huge current-account deficit when the U.S. dollar soared to 120 yen in 1997 from 79 in 1995. The losses translated into the late 1997 foreign currency crisis. A weakening of the Japanese currency directly hurts the international competitiveness of Korean products. Korea appears to maintain trade surpluses because exports exceeds imports. But we must not overlook the fact that companies have been losing money in exports while trying to compete with rival Japanese products. Global economic stagnation and the weak yen have weakened Korea Inc. and led to a protracted slowdown in Korea. Solutions to fight the slump must be based on these causes.
The government has been asking companies to raise salaries for employees as part of a means to stimulate domestic demand. Since the global economic downturn resulted from losses of income by workers for the sake of bolstering shareholders’ interests, the solution is obviously wage increases. But Korean companies are struggling to compete with the weak yen. How to square that circle is the challenge. There can be several policy means to help companies meet these challenges better.
First, the Korean central bank should follow the monetary policies of the U.S., European Union and Japan. It must keep bringing down interest rates and it should also launch a large-scale quantitative easing and continue with it until the won is weakened. Then, Korean companies will have no reasons to defer increasing employee wages. Japanese companies also raised employee salaries after the weakened yen helped their balance sheets.
Second, the government must offer systematic training for aspiring job-seekers. Such programs can help raise labor productivity and won’t hurt profit figures in companies following wage increases. Companies are recruiting mostly experienced workers and shunning novices to save initial training expenses.
The state must fill the gap. Korea’s economic slump must be addressed quickly. Desperate times demand desperate measures.
Translation by the Korea JoongAng Daily staff. JoongAng Ilbo, April 2, Page 29
*The author is the vice chairman of the Korea-Japan Economic Association.
by Rhee Chong-yun