Keynes in Korea
The author is an editorial writer of the JoongAng Ilbo.
Who’s responsible for feeding wrong information to President Moon Jae-in? He has been distinctively out of tune with our economic reality. The president cannot tend to every state affair. His thoughts and comments must have been influenced by briefings and scripts from his aides. His misconceptions have often been repeated and raise concerns the president seriously believes the misinformation.
Last year, he claimed that the effect of the minimum wage increases was 90 percent positive. But the job catastrophe as a result of the increase in the minimum wage shows little sign of easing. He said the economy was moving at a “solid pace” this year. Yet consumption, investment and industrial output all remain in the dumps. Exports that had barely buttressed the economy last year are declining for the sixth consecutive month. Sagging corporate performance led to reduced tax revenue.
The income-led growth policy has been the epicenter of trouble and misconception. Last month, Moon claimed that income-led growth was a concept “with historical roots,” citing recommendations by the International Labor Organization.
Michal Kalecki, a 20th-century Polish progressive economist, made a similar argument, saying that wage increases boost consumer income and thus consumption. Both economists called for increases in wages to stimulate the economy, but simultaneously emphasized improvement in productivity to fuel growth of the economy in the longer run. There is clearly a difference with contemporary Korea.
Demand at home and abroad is not as weak as in the ’30s. Rather, oversupply is a bigger problem, as a result of fast advances in technology and innovation. Industrial product choices are abundant. A greater concern is a possible global spread of Japan-like deflation. Raising wages against such a backdrop won’t aid productivity and sales. Household income or consumption can hardly be expected to increase when a convenience store owner has to hand over half his monthly profit to his shopkeeping staff.
The high number of self-employed is another factor that makes the wage-led growth policy hard to apply in Korea. The share of the self-employed in the working population exceeds 25 percent in Korea, sharply higher than the 12 percent average in other OECD member countries. Our minimum wage has increased by 29.1 percent over the past two years. Self-employed businesses were wrecked and jobs paying minimum wage were lost.
Even an effective drug cannot work on everyone. In some cases, it can cause serious side effects. Fast aging will inevitably further increase the number of self-employed in this country. Steep increases in the minimum wage under such circumstances would seriously damage the economy. According to Kim Nak-yeon, a Dongguk University professor, a 1 percent increase in the minimum wage can cause 10,000 to become unemployed. As a result, those with lower incomes will suffer the most.
Keynesian theory on aggregate demand was utilized by the United States and Britain during times of economic emergency. It should make up a part of — not the entire — policy. Aides must frankly tell the president that the income-led growth policy is unproven and cannot work in Korea. They must be honest about the toll on the economy by the minimum wage increase before more harm is done.
JoongAng Sunday, June 1-2, Page 30