Spreading some painNothing can be more urgent for the Korean economy than structural reforms. The supplementary budget and other fiscal stimuli are designed to fend off a temporary depression and fallout from industrial restructuring. Reforms must not be selective. The reform targets the government is aiming at — labor, public sector companies, finance and the education sector — are not enough.
A complete overhaul is needed to change our economic ecosystem. A slow-growing economy and aging society have become realities. We may soon face the zero or negative growth that we last experienced during the 1997-1998 foreign exchange crisis. On top of stagnation, the economy is saddled with polarization. We may be headed for tougher days than Japan during its lost decades. At least it didn’t have to deal with significant income inequalities.
Reforms are not easy. Workers from the public sector to the banking sector have gone on strikes in protest of the introduction of a merit-based salary system. Broader reforms could hardly be attempted when a single change draws such a strong backlash. Former German Chancellor Gerhard Schröder is famous for initiating a series of unpopular reforms dubbed Agenda 2010 in the 2000s that ended up rationalizing and strengthening the German economy.
A radical change requires boldness from a leader. Reforms would only reap results two to three years later. The leader must have the courage to withstand opposition and see through his or her agenda. But politicians pursuing elected office rarely have that kind of will and courage. Sacrifice is also demanded. Even with a public office at stake, a politician must place the national interests first.
Former Japanese Prime Minister Junichiro Koizumi was a rare Japanese politician and statesman who saw through reforms. By the time he finished as one of the longest serving prime ministers in Japan, he received credit for ending Japan’s lost decade. He did not pursue a populist agenda. One of the first things he did upon taking office in 2001 was reforming the tight and rigid bureaucratic society. He believed that the strong network of the power-wielding class must come to change in order to persuade the people about further reforms.
Reforms are only possible through courage and sacrifice from the leader. Reforms always trigger conflict. Most conflicts of interests are hard to coordinate. Politicians who rely on votes cannot afford to volunteer in settling the fights. But politicians must jump in the ring to make reforms successful. They must persuade the concerned parities whose interests could be hurt from the changes. Sadly, we lack leaders like Schröder or Koizumi. All the aspiring presidential candidates talk of reforms. But their rhetoric is aimed at pleasing the ears of every party. They merely repeat textbook-like promises.
Taxes are one area demanding action. Taxes should be upped to finance increasing social welfare costs. To mainstream politicians, tax hikes means higher levies on large companies and rich individuals. They want to avoid talking about the fact that 48.1 percent of salary workers and 47 percent of companies do not pay taxes at all. Adding another top-income bracket is welcomed. At the same time, the tax code must be overhauled so there aren’t so many exemptions.
Politicians tend to think lightly of corporate taxes. They believe it is better to anger our companies than our people. But they are wrong.
Corporate tax is closely related to investment, and higher taxes would translate into less investment. Korea’s tax collections from companies against total tax revenue is higher than the average of the members in the Organization for Economic Cooperation and Development. If taxes need to be raised, it should first be the surtax (consumption tax) and income tax. But few dare to suggest raising the surtax as that would affect all consumers. The only target politicians can think of is the rich.
Another area is small and mid-sized enterprises. Political leaders all emphasize bolder support for small- and mid-sized companies. They promise heavier penalties on chaebol capitalizing on smaller suppliers. It is true that Korea’s small and mid-size sector lags in competitiveness. They are weak partly from the unfair and predatory practices by large companies. The relationships of large and smaller enterprises must change.
But that is not all. The smaller businesses have failed to grow because they have been over-protected and reliant on government support. Three out of 10 small- and mid-sized companies do not earn enough to pay even the interest on their debt. They, however, muddle along on state-sponsored credit and support.
Before support, they must be restructured. The weak must be combed out and led to the exit. Support for the stronger can come afterwards. But no one talks of restructuring the small- and mid-sized sector because it is responsible for the jobs of 99 percent of the companies and 88 percent of working Koreans.
The rice subsidy also is an area needing a fix. The government this year alone spent over 3 trillion won ($2.6 billion) to buy and store excess rice yield. This is repeated every year. Again, no one dares bring it up as it could be immensely unpopular with farmers.
We do not have much time left. Our future hinges on reforms. We must not go on reciting wish lists with no intention of implementing them. There must be a leader who is bold enough to ask the people to share the burden and some pain. It is the only way we can get restructuring in progress into the next government.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Oct. 14, Page 32
*The author, a former editorial writer of the JoongAng Ilbo, is an adviser at the Korea Institute of Finance.