Scrap income-led growth
*The author is a senior editorial writer of the JoongAng Ilbo.
The Moon Jae-in administration, in its first year, utterly missed its aim in economy policy to generate growth by boosting incomes. Over a year, incomes of the poorest class declined while the number of new hires by companies were cut by a third. President Moon said that deteriorating job conditions were painful, but declined to change his income-led growth policy, claiming it was too soon to declare it a failure.
In its latest report on Korea, the Organization for Economic Cooperation and Development (OECD) linked the sharp increase in Korea’s minimum wage to job losses in the wholesale and retail sectors. It warned that further raises in the minimum wage could push inflation above target and have a negative impact on Korea’s international competitiveness if they are unmatched by higher productivity. The harder the government pushes the policy, the greater damage it may cause the economy.
While introducing the new senior secretary for economic affairs, Moon’s Chief of Staff Im Jong-seok said that Yoon Jong-won, former head of Korea’s mission to the OECD, was chosen for the job thanks to his belief that the inclusive growth initiative of the OECD is in tune with the government’s economic direction of generating growth through income increases, innovation and economic fairness. The government arbitrarily defined its income-led growth as synonymous with the better-known inclusive growth. But the two are entirely different.
The inclusive growth championed by the OECD and the International Monetary Fund is an established theory in mainstream economics. It respects the market and does not interfere in its price-determining mechanism. The initiative calls for governments to address challenges from the market economy such as inequalities to ensure benefits are more equally shared and focused on the well-being of the people. It demands more government action on income redistribution and social welfare. The concept advises a government to play a supplementary role without interfering with free market activities.
Income-led growth comes from the pro-labor front. It calls for a greater government role in bolstering demand and justifies direct meddling in the setting of prices. The government has pushed up the minimum wage while forcing wireless carriers to cut monthly fees as promised by Moon in his campaign. The disruption in the market wrecked self-employed businesses.
Still, the government had plenty of others to blame for the pain felt by small merchants, such as landlords for charging excessive rents, credit card companies for charging excessive commissions and franchisors for exploiting franchisees. When market instability continued, the liberal government resorted to hefty fiscal spending to compensate for the losses to small merchants.
The toll from Moon’s experiment in economics has been heavy. According to textbook theories, the minimum wage should be raised when employment is near perfect — and within the context of not injuring growth and jobs — and selectively in consideration of regional gaps and types of jobs. The government ignored these conditions and enforced a universal hike of 16.4 percent a year. It should be no surprise that jobs and incomes in the bottom income bracket have been hit the hardest.
The policy has already lost favor with the public and exposed undeniable shortcomings. Comments from key officials from the ruling party, the Blue House and the government suggest easing of the policy. In a meeting with mid-sized business heads, the ruling Democratic Party’s floor leader Hong Young-pyo said, “Given the condition of small merchants, it is not easy to raise the minimum wage to 10,000 won ($9). We should aim for inclusive growth.” On the following day, Deputy Prime Minister for the Economy Kim Dong-yeon defined “inclusive growth” as a kind of “hybrid of input [income]-led and innovation-led growth.”
Over the last few days, key officials from the ruling party and government have been pitching the same “inclusive” concept. It’s as if they are ready to dump the policy without admitting it.
Of course, the labor front is not happy. The militant Korean Confederation of Trade Unions staged a rally over the weekend to protest the changes to the minimum wage policy and a six-month moratorium on enforcing the new 52-hour workweek. Rep. Roh Hoe-chan from the left-wing Justice Party criticized the government for abandoning income-led growth. “Taxes should be spent on increasing wages and jobs, not to enlarging the National Intelligence Service’s special expense account,” he cried. The progressive camp demands a more aggressive fiscal policy to finance income-led growth, but economic conditions at home and abroad are too vulnerable to withstand such policy experiments.
The main Kospi index retreated to the level before the presidential election in May 2017. The experiment has wiped out all the gains over the year. U.S.-triggered interest rate hikes and a trade war have added to volatility in financial markets, whereas expected increases in public insurance fees and utility bills from Moon’s nuclear reactor phase-out policy, and possible revived inter-Korean economic ventures, could all translate into a greater burden on taxpayers. Moon has ordered the government to examine industrial and business sites as often as possible due to concerns over the economy in the second half of the year.
Whether a policy shift towards inclusive growth will change the mood remains questionable. Consumer and business sentiment have hit bottom. Employers have streamlined to prepare for a minimum wage of 10,000 won, while consumers as well as businesses have cut spending.
When sentiment is low, no cure will work. The government might as well admit it has failed and publicly vow a change of direction to lift economic players’ dampened sentiment.
Former liberal President Roh Moo-hyun in his memoir recalled that progressive figures were noble in their ideals, but clumsy in policymaking. Let’s hope we do not hear the same mea culpa from contemporary progressives.
JoongAng Ilbo, July 4, Page 31