[NAVIGATING CRISES] Ideology meets the reality of crisis for President Yoon Suk-yeol

Economy

Published: 01 Sep. 2022, 18:44 Updated: 01 Sep. 2022, 19:21

[NAVIGATING CRISES] Ideology meets the reality of crisis for President Yoon Suk-yeol

President Yoon Suk-yeol watches a demonstration of a robot maneuvering in Daegu on Aug. 26 where he attended a regulatory innovation strategic meeting. [YONHAP

President Yoon Suk-yeol emphasized "liberal democracy" and the "market economy" in his inaugural speech in May.

"I stand before you today, humbled by the trust and responsibility that you have given me and mindful of my solemn duty to rebuild this great nation," Yoon said in May. "It is our generation's calling to build a nation that espouses liberal democracy and ensures a thriving market economy."

In the four months since, the government has been rolling out policies targeting the liberalization of the private sector. This includes lowering the corporate tax rate and reducing the role of the government in the economy.

During a press conference to mark his first 100 days in office, Yoon reiterated his commitments, calling the efforts a normalization.

Reversing economic policies

"Y-nomics," or "Yoonomics," is about taking the government out of the economy.

The goal is to revitalize the economy with fewer business restrictions and lower taxes, and the hope is that the profits generated will create jobs and result in higher investment, creating a virtuous cycle.

This is a complete reversal from previous administration's "income-led growth."

"We have restored common sense," Yoon said at the press confernce in August. "We have abolished wrong economic policies, such as income-led growth, while normalizing the economy to be centered on the private sector, the market and the average person."

The goal of income-led growth was to boost the economy with higher incomes. Working hours were reduced and the minimum wage increased.

Huge sums were spent on creating menial public-sector jobs, such as neighborhood park maintenance, for senior citizens.

"Public jobs have to play a supporting role," said Kim Dae-jong, a Sejong University professor of business administration. "The Moon Jae-in government was focused on creating three-to-six-month short-term jobs for people in their 60s and 70s instead of creating an environment where businesses could strive and thus create quality jobs."

President Yoon aims at giving more autonomy to the private sector instead of trying to boost the economy with aggressive spending, which contributed to a fiscal deficit for three consecutive years, the first time this has happened since the financial crisis of the late 1990s.

"I think the government's role is to support systems where the market operates efficiently and fairly while implementing market policies that reduce risks and achieve a stable balance so that the economic participants and companies can maximize their capacity autonomously and creatively," Yoon said.

Yoon sent a strong message to the private sector by meeting with six business groups, including the Federation of Korean Industries, which had been shunned by his predecessor.

The president-elect said the role of the government is to get rid of regulatory obstacles to allow private businesses more freedom to make judgements and freely invest and thus expand.

Yoon's top cabinet members have been supporting the private sector, including Finance Minister Choo Kyung-ho, who along with Financial Services Commission Vice Chairman Kim So-young, an economic professor who served at the president transition office, met with the five largest financial companies not long after their confirmations in May.

FSC chairman Kim Joo-hyun, who started work in July, also met with the heads of banking groups while promising of regulatory innovation.

Korea's version of Reaganomics

The key pillars of the Y-nomics is the reducing taxes and lifting regulation.

In July, the Yoon government announced a 13.1 trillion won tax reform plan.

The key pillar of the reform is a lowering of the corporate tax rate to 22 percent from 25 percent. This will reduce taxes paid by corporation by 6.8 trillion won annually, according to estimates.

"In competing globally, our businesses could be more competitive and create value-added if we follow the OECD average corporate tax rate," Yoon said in June.

Korea ranks ninth among the OECD member countries on the corporate tax rate. The average OECD corporate rate is 21.5 percent.

This is a form of the "trickledown" economic model championed by U.S. President Ronald Reagan.

"After U.S. President Reagan reduced taxes through Reaganomics, the U.S. economy enjoyed robust growth while new jobs were created," said Sung Il-jong, People Power Party's policy chief, during a radio interview.

Choo argues that the cuts will more than pay for themselves.

"The lowering of corporate taxes is a mechanism to encourage investment and create jobs," Choo said in June. "This will expand the tax base."

The previous government raised the corporate tax rate from 22 percent to 25 percent, a first in 27 years.

A study released by Korea Economic Research Institute (KERI) last month argues that Samsung Electronics is at a disadvantage to TSMC, the market leader in custom chip manufacturing, due to the lower tax rate in Taiwan, where the rate is 20 percent.

TSMC also gets a 15 percent tax credit for R&D and benefits from government support of human resources development. Samsung Electronics gets a 2 percent tax credit on its R&D investment.

"Amid our companies competing in semiconductor technology, minimum support at almost the same level of other leading companies abroad is needed," said Lee Kyu-seok, a KERI researcher. "As such, lowering corporate taxes, increasing tax credits for R&D and facility investment and educating workers for chipmaking are urgent."

Yoon has also proposed a lowering of the inheritance tax.

Currently, shares in businesses will 400 billion won or less in sales can be exempt from inheritance tax under certain conditions. This will be raised to 1 trillion won.

Some conditions, such as 80 percent of the workers being regular works, are being scrapped.

The maximum exclusion on the inherited assets being taxed is being raised from 50 billion won to 100 billion won.

The government has raised its tax credit for the facility investments in areas that are labeled as national strategic technologies, including semiconductors, batteries and vaccines.

Large companies will be able to take investment tax credits of up to 12 percent of the investment, up from the current 2 percent.

"It is not an issue of ideology or politics but an economic issue closely related to people's livelihoods," President Yoon said during a visit to a robotics company in Daegu last week.

He said the purpose of deregulation is to create quality jobs that will benefit average households while contributing to the economy rather than relying on government funding to create jobs.

"A regulation that does not meet reality could determine the life and death of a business," Yoon said, stressing the urgent need to change regulations to meet the changing times.

Presdent Yoon Suk-yeol meets with the heads of Korea’s six leading business groups, including the Federation of Korean Industries, on March 21 in Seoul. [JOINT PRESS CORPS]

Labor changes

Yoon, like Reagan, has been tough on labor.

Reagan fired striking air traffic controllers, who were prohibited by law from striking.

Yoon was tough in dealing with a strike by workers at Daewoo Shipbuilding and Marine Engineering.

The strike, which lasted for 50 days, ended in July with the shipbuilder suffering an estimated 500 billion won of losses.

The president said that if the protests continued the government would take legal action.

"The current labor law system is an agreement that the public has made in solving foundational labor and management conflicts," Yoon said last month. "Because it is an agreement that has already been made, I believe it is important to try to strictly follow it."

Weakening potential growth

Yoon's drive to overhaul the economic structure and strip down the policies of the previous administration comes as Korea's economic potential wanes.

The biggest factor is the low birthrate and the aging population.

The number of newborns has been falling every month since 2015.

Those aged 65 or older will account for more than 20 percent of the population from 2025.

And these population changes have already had an impact on the economy.

The working age population, who are those between aged 15 and 64, has been shrinking since 2017.

This year, the number is 35.3 million, 70.5 percent of the population. By 2040, that is expected to drop to 26.8 million, 55.7 percent of the population. About half of the population will have to support the elderly.

Bank of Korea Governor Rhee Chang-yong raised concerns about Korea's weakening potential growth due to the population decline during his confirmation hearing in April.

"As low birth rate and the aging population are getting worse, we need to be concerned about the possibility of a low-growth structure much like in Japan becoming permanent," Rhee said.

The governor stressed the need for major structural changes so that new growth engines and new industries can be created.

In order to achieve this goal, improving the productivity, especially in the private sector, improving the flexibility of the labor market and creating an innovative ecosystem are essential.

"The decline in the working age population could be a factor that reduces the labor supply, which could affect the overall economic production potential," Rhee said.

"The problem will only get worse if we don't properly address low growth, low birthrates and the income gap," Yoon said while campaigning on Jan. 11.

"To overcome chronic low growth, our economy has to change from one government centered to one private-sector centered."

Fierce catchup

Korea has been one of the top competitors in several high-value added industries, especially semiconductor and batteries, which are essential today.

In recent years, that position has been threatened by China, Korea's largest export market.

One such area is LCD display panels, which Korea has conquered since 2004 and had a 50.7 percent share in 2012.

China has taken the No. 1 position after BOE acquired the LCD unit of Hyundai Electronics in 2008.

Korea's global LCD market share in 2021 is estimated at 11 percent compared to China's 41.5 percent.

Samsung Display ended LCD production after 30 years earlier this year.

The company said instead it is focusing on high-end quantum dot displays including OLEDs.

LG Display is downsizing its production of LCD panels for TVs while reorganizing its businesses to focus more on OLEDs.

"Until the first half of next year, we have decided to downsize our LCD business as it has become difficult to have distinguished competitiveness," said Kim Hee-yeon, LG Display senior vice president, during a conference call in July. "We will maintain the LCD line at our factory in China only for IT and commercial panels."

China is already ahead of Korea in information and communication technology and software.

A report by the Export-Import Bank of Korea's research department in May found that China's DRAM chip development is catching up fast and is only five years behind. For NAND flash, it's only two years behind.

Korea currently has the largest global market share in DRAM chips.

According to the bank's Overseas Economic Research Institute report, while China currently struggles with profitability, in the long-run, it will become a major threat to Korean companies due to the full support of the Chinese government.

The U.S. government's moves against China on semiconductors has forced the country to speed up the development of its own computer chips.

The Korea International Trade Association in a report released last month found that China has been increasing the localization of semiconductor manufacturing equipment from 21 percent at the end of last year to 32 percent in the first half.

Overcoming current crisis

Yoon's push for more freedom for businesses is also triggered by the jobs that have been lost due to the implementation of income-led growth during the early years of the Moon administration.

While most of the focus was on the jobs that have been lost by part time workers at restaurants and convenient stores due to the 42 percent minimum wage hike made under the Moon government between 2017 and 2022, a recent study found that large companies have relocated jobs to countries with lower labor cost.

A World Bank study released in June estimated that roughly 35,000 jobs in manufacturing were relocated overseas between 2017 and 2019 due to the significant increase in the minimum wage.

"Contrary to the conventional wisdom that multinational companies would be the least likely to be affected by the minimum wage increase, we find strong evidence of their relative reduction of employment by about 3 percent after the policy shock compared to non-multinational companies," the report noted.

The worsening economic situation, which includes inflation, the weakening of the won against the dollar, coupled with the central bank's unprecedented rates increases, is raising concern that the administration is holding back.

"The government needs to provide a clear direction on its economic growth plan beyond making adjustment and normalizing the policies of the previous administration," said Sung Tae-yoon, a Yonsei University economic professor. "But first, it needs to handle the urgent situations before making structural reforms and regulatory changes."

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]