Taking notice overseas

South Korea’s economic conditions are starting to draw concerns from overseas. In an interview with a local media outlet, Jonathan Woetzel, director of the McKinsey Global Institute, warned that the pro-labor policy of the Moon Jae-in administration could suck up public finance without producing the desired effect. Noting that the government is trying to boost domestic demand through increased wages and public-sector jobs, he said that inflated demand unmatched by productivity improvement could only destroy public finance. The Korean economy remains a frog in slowly boiling water, he added.

In an article titled “The Fear of China’s Shadow,” the Financial Times pointed out that South Korea faced a number of structural problems and warned that it would fall right into a lengthy slump like Japan if it did not quickly find a new growth model. The Moon Jae-in administration’s model led by income increases has hit a stumbling block due to resistance from small merchants that cannot afford steep hiring costs.

The Korean economy is seriously weakening from the effects of the wage-led policy. Monthly job additions that topped 300,000 until last year have stopped at 5,000 in July. Wholesale, retail and other service sectors that pay mostly by hourly and minimum base shed 181,000 jobs. The government and ruling party hastily packaged up relief measures for small merchants and self-employed. They did not mention any change to the minimum wage that would be bumped up by another 10.9 percent next year after this year’s 16.4 percent.

The logic behind income-led growth has been simple. It is based on the naïve belief that increases in income and wages will spur consumption and economic growth. But that theory cannot work in a globalized context, especially for the Korean economy that is highly reliant on external demand. Waning demand from outside hurt manufacturing jobs at home and further dampened consumption. Kim Kwang-doo, vice chairman of the National Economic Advisory Council who had designed economic policy for President Moon Jae-in, also admitted to the shortcoming of the trickle-up wage theory.

The Organization for Economic Cooperation and Development advises Korea to focus on raising productivity to stimulate growth and set the economy in a benign cycle so that the fruits from growth lead to increases in income. The government must change its direction before its stubbornness causes lasting harm.

JoongAng Ilbo, Aug. 23, Page 30