Back to basics
The author is a senior columnist of the JoongAng Ilbo.
“Disconnection and the incompetence of the past administration has pulled South Korea down. As a result, the country is facing cliffs in growth, employment and population. As the economy has lost growth momentum, the young — without jobs — have given up hopes to start a family,” presidential candidate Moon Jae-in claimed in May 2017. He presented his so-called “income-led growth” concept as a cure-all for the slow-moving economy, deepening wealth inequalities and joblessness. The prescription has been tested out on the economy over the last 18 months.
The results of the untested economic ideology have been catastrophic. Economic growth, unemployment and demographic weaknesses all worsened. Growth has plunged to barely over 2.5 percent from last year’s 3.0 percent. Around 300,000 jobs were wiped out from the manufacturing sector and services areas of lodging, restaurants, wholesale and retail after the minimum wage increased by double digits. More young people are shunning both marriage and having kids. The birth rate sank to 0.95 in the third quarter. The gap between the top and bottom 20 percent income brackets widened to 5.52 times, the highest level in 11 years. The government’s bold experiment in income-led growth has been very costly.
Fortunately, the administration is now showing some flexibility in its relentless pushing of the policy. Moon confessed that the economic state was “grave,” admitting that his attempt to create jobs failed. He asked a senior government official if he really believed the minimum wage hike had been too steep. What has made him suddenly waver on his conviction? The only plausible reason could be his plunging approval rating. Moon, who enjoyed an unprecedented rating close to 80 percent last year, may have been shocked to find his polling numbers go down to around 45 percent. Most of the negative sentiment stems from the difficulties in the economy: a failure in economic governance has brought about a political awakening.
On Monday, the president chaired the first expanded cabinet meeting on economic affairs since he took office in May 2017. He vowed to adjust the minimum wage and flextime in working hours “according to public consensus.” He needs not wait. Polls show overwhelming opposition to his economic policies: 20.5 percent want a freeze in the minimum wage next year after a double-digit increase this year, while 50.8 percent accentuated the need to moderate the pace of the wage hike. That’s not all. Nearly half — 45.8 percent — called for more flexibility in the rigid application of the 52-hour workweek. In short, the public wants the government to chuck away its income-led growth policy.
But the future is full of land mines. Two months after Moon was inaugurated, the administration pushed up the minimum wage for 2018 by a whopping 16.4 percent. It has been dragging its feet on making adjustments. Despite its speed in raising the minimum wage, the administration plans to take all the time it wants to make any changes — setting up a task force, reviewing the existing regulations, gauging opinions from experts, and holding hearings among different age groups and regional communities. By the time it makes any moderations — possibly in 2020 — our economic conditions could be beyond repair.
The signs are ominous: the government is still reluctant to accept reality. “It is difficult not to accept that our economic condition is not good,” it said in a recent statement. Most analysts predict the economy will be worse off next year. Higher interest rates could trigger off debt bombs in the private sector and prick bubbles in real estate assets. China’s slowdown also poses a risk. But authorities are short on policy ammunition.
Moon is a good player of the game of Go. In an introduction to a Go guide book three years ago, he wrote that he learned wisdom through the game. “We must always try to see big and far, a broad picture. A trick can never win,” he said. A classic strategy in Go is to “discharge anything unnecessary in the face of a crisis.” Another Go adage is that if a player has to employ three clever moves, they lose the game as it means they are desperate.
The time has come to let go of the unhelpful policy. The government must stop wrecking the economy through drastic hikes in the minimum wage and a reduction in the workweek. There are certain rules economies must abide by: they are better when run on the economic concepts of competitiveness, efficiency and voluntary restructuring instead of political jargon such as fairness and democratization. The United States is enjoying an economic renaissance thanks to shale gas and the digital revolution. What fuels growth is raising productivity through deregulation, new technologies and a flexible labor market.
Moon recently ordered his secretary to print out reports in a bigger font. The former lawyer-turned-president is an obsessive reader. If he has time to read, he should try a book published in 2012: “The Economy Grows While Politicians Are Asleep.” The less politicians interfere, the better the economy gets, according to the author. The best the government can do to aid the economy is to leave it up to the market and economic players. The economy becomes predictable when it is led by the market. Companies and consumers will spend when they can predict a better future. Otherwise, the next presidential candidates will criticize the outgoing president for having been “uncommunicative and incompetent.”
JoongAng Ilbo, Dec. 19, Page 35