Bound for lost decades?
The author is a professor of economics at Korea University.
How will the future generations evaluate the Korean economy of the past two years? They will probably say the government’s income-led growth experiment formulated by radical leftist scholars did not produce the desired outcomes. I am particularly worried that our future generations will find the risky economic experiment led to beginning of a Korean “lost two decades.”
The real face of the income-driven growth is being exposed. The theory — based on the hypothesis that minimum wage increases would boost worker income and fiscal investment would boost household income to accelerate economic growth by improving distribution and domestic demand — did not bring the desired results. Excessive market intervention led to more adverse effects. As distribution is prioritized — and improvement of economic fundamentals is neglected — growth potential is declining and quality jobs are not increasing.
Real gross domestic product (GDP) in the first quarter declined by 0.3 percent compared to the previous quarter. While the growth rate this year will be affected by fiscal spending, monetary policy and international market conditions, it is likely to grow at the slowest pace since the 2009 global financial crisis. New jobs decreased from 316,000 in 2017, to 97,000 last year. After being critically affected by drastic minimum wage increases, small businesses had to cut employment or shut down. Employment in retail and wholesale, lodging, restaurants and manufacturing all continue to decline. The government is spending billions of dollars to create jobs in the public sector, but sustainable quality jobs are lacking.
A Wall Street Journal article on Feb. 20 claimed “South Korea is often vaunted as one of capitalism’s biggest success stories. These days, it’s home to the one of the world’s boldest left-wing economic programs.” It argued that the radical minimum wage increase experiment led to the decrease in employment and growth. At a Korea Chamber of Commerce lecture on March 27, New York University Prof. Paul Romer — the winner of the 2018 Nobel Prize in Economics — claimed that rapid minimum wage increases reduce labor demand, and if the Korean government focuses on short-term policy of offering cash or creating temporary jobs, workers cannot acquire skills. In Korea’s economics field, many statistical studies prove that radical minimum wage increases caused a decrease in job numbers.
The income-driven growth policy of increasing the minimum wage and expanding social welfare spending did not accelerate employment and growth. As the government increased taxes and reinforced regulation, investments in private facilities and construction shrank. A “big government” cannot solve all economic problems, and excessive market intervention only brings unintended adverse effects. As the central and local governments competed to expand welfare systems and overly promote universal welfare, the economic dynamic may lose steam and the national debt can grow rapidly.
If misguided policies continue and a major external shock hits us, we may experience the “lost decades” of Japan. The Japanese economy began to decline as export competitiveness fell and both the real estate and financial bubbles burst. While increased government spending attempted to boost the economy, the private sector remained stagnant and the fiscal deficit accumulated. With the aging of the population, the burden on the public pension and medical insurance rapidly grew. Government debt to GDP increased from 64 percent in 1990, to 247 percent today, the highest among developed economies.
Today, the Korean economy is similar to the Japanese economy of the ’90s. Japan’s per-capita GDP was $31,400 in 1992 and Korea’s per-capita GDP last year was $31,300. In 1995, the population over 65 in Japan was 14.3 percent, similar to that in Korea today. By 2034, Korea’s population over 65 will be 28 percent, similar to Japan’s today, according to the Statistics Office. As in Japan’s experience, the productive population will decrease, growth potential will decline and government debt will rapidly grow as pension and medical insurance burdens increase.
Korea may experience a more serious crisis than Japan’s “lost two decades.” Japan has a solid domestic market with 125 million people. Its share in the world’s GDP based on buying power was 9 percent in 1990 — the second in the world — and 4 percent today. Korea’s domestic market is far smaller, and its economy is dependent on export markets in China and the United States. Japan has the yen, an international settlement currency, and would not experience currency crisis despite huge national debt. But Korea is more vulnerable to external shocks. Greece — which reached $30,000 in per-capita GDP in 2008, but fell to below $20,000 due to economic crisis and political confusion — could be Korea 10 years from now.
Two years ago, in May, a new administration was established. But its approval rating, which hovered over 80 percent, has fallen to the low 40s. One of the reasons for public disapproval was a lack of skills to resolve economic issues. In the third year, the Moon administration must change its economic policy. It must listen to what economic experts say. Policies that burden private companies should be reconsidered.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, May 2, Page 31