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South Korea Runs an Economic Experiment With Global Relevance

Category: Business,Finance

INCHEON, South Korea — As President Trump leads a drive to slash taxes and pare back regulation, one major economy is taking a different approach.

Under President Moon Jae-in, South Korea has raised taxes and the minimum wage in the name of economic growth. So far, it hasn’t worked out as planned.

Growth has slowed, unemployment has risen and small-business owners like Moon Seung are complaining. Mr. Moon, founder of an auto parts maker called Dasung in Incheon, an industrial town near Seoul, says his labor costs were up an extra 3 percent last year after the minimum wage rose to 7,530 Korean won, or about $6.70, an hour. That may not sound like much, but it ate into his razor-thin profit margin and prompted him to stop hiring.

“We can’t take it,” Mr. Moon said. “This is a problem not just for the employers, but for the employees.”

With his progressive policies, President Moon is trying to tackle some of the same economic problems that plague the United States and much of the developed world. They include a widening wealth gap, slower growth and stagnant wages.

The discouraging early results don’t mean that Mr. Moon is wrong and Mr. Trump is right. Wage growth in the United States, though stronger in recent months, has generally remained stubbornly low despite the tightest labor market in a generation, and the American economy is widely expected to slow in 2019 as the economic sugar rush of Mr. Trump’s tax cuts wears off. Pro-business policies in Europe, where labor laws are being loosened, have been met with large-scale protests.

Still, South Korea’s troubles suggest the limits of the state in solving economic problems, especially without addressing the underlying structural issues. Rapid changes like Mr. Moon’s can also have unintended consequences for small businesses and others.

For South Koreans, the new economic reality has been especially jarring. The country rose from poverty starting in the 1960s to become an industrial powerhouse, playing a critical role in global industries like semiconductors, smartphones and flat-panel TVs.

At nearly $30,000, South Korea’s per capita income is roughly equivalent to those of Italy and Spain, and its 51 million people now face conditions common to developed nations, such as lower growth rates, an aging population and rising competition from China.

After his election in May 2017, Mr. Moon undertook a sharp shift in economic policy. He supported higher wages, tighter restrictions on working hours and greater welfare spending, funded by tax increases on companies and high-income earners.

“Our quality of life has been somewhat deteriorated, and income disparity has been widening,” said Yoon Jong-won, Mr. Moon’s senior secretary for economic affairs. “This is not the road we should continue to follow.”

Past tax cuts did little for growth or the wealth gap, Mr. Yoon said. Instead, Mr. Moon aims to improve the incomes of average Korean families so they will consume more, thus reducing the economy’s reliance on exports and, with them, the ups and downs of the global economy. (Exports accounted for 43 percent of South Korea’s gross domestic product in 2017, compared with 20 percent for China.)

But joblessness hit an eight-year high in August of 4.2 percent after the new minimum wage took effect, though it has since improved. Growth was at 2 percent in the third quarter compared with the same period a year earlier, down from 2.8 percent in the second quarter.

The biggest problem is the strain on small businesses, which are often unable to pass on higher costs to their customers. In a 2017 survey of its members by a small-business organization known as Kbiz, 42 percent said they would be forced to shed employees because of the minimum wage increase.

Song Minji, the founder of Pygmalion, a design and publishing company in Seoul, said she had decided not to replace two departing employees and instead had parceled out their responsibilities to the eight who were left and enlisted freelancers.

Though the Moon administration has offered subsidies to small companies like Ms. Song’s to mitigate the jump in labor costs, she said they were insufficient and so complicated to obtain that she has given up trying.

“It would have been better if the policies were applied in steps rather than in one go,” Ms. Song said.

Others say Mr. Moon is moving too slowly. Some union leaders argue that the minimum wage is not rising quickly enough, and they objected to a proposal that would give businesses more flexibility in meeting limits on working hours. On Nov. 21, an estimated 160,000 workers went on a general strike.

“We had high expectations for this government,” said Lee Joo-ho, an executive director at the Korean Confederation of Trade Unions. But now “there is a possibility that the government is backing out or even reversing on the intention of their policies.”

Mr. Moon has paid a steep political price for his agenda. His approval rating has plummeted from 84 percent in mid-2017 to 45 percent in the most recent Gallup poll. Nearly half of those who disapproved of his performance cited his inability to fix the economy. In an attempt to mollify his critics, Mr. Moon removed his two top economic policymakers in November.

Conservative analysts would point to Mr. Moon’s struggles as evidence against a more state-led approach to the economy. But some economists argue that it is too soon to judge Mr. Moon’s program.

“It is difficult to catch two birds — economic growth and even distribution — with one stone,” said Jung Yoo-shin, dean of the Graduate School of Management of Technology at Sogang University in Seoul. “He needs more time.”

Frederic Neumann, co-head of Asian economics research at HSBC in Hong Kong, said South Korea’s export-led economy had been hurt more by the slowdown in global growth than the higher minimum wage. Though he is forecasting lower growth for South Korea in 2019, Mr. Neumann said lifting wages among lower-income people was good for the economy.

“In principle, the Moon government has struck out and done something that few other governments have done,” he said. “How it plays out in Korea will in years to come inform policy choices elsewhere to some extent.”

In the meantime, Mr. Moon has no intention of changing course. “The path my president has suggested might be somewhat new and unfamiliar,” said Mr. Yoon, the senior secretary. “But this is the sustainable way of running the economy.”

The 2019 budget represents the sharpest increase in spending in a decade, and there are plans to help small enterprises by weakening the economic stranglehold of the country’s large business conglomerates, called chaebol.

The minimum wage has also gone up again for 2019, by 11 percent. The president remains committed to meeting his campaign pledge of lifting the minimum wage to 10,000 Korean won an hour, or about $8.90, which would require a further 20 percent increase.

For now, though, South Korea is bracing for the continued impact of Mr. Moon’s policies. Back at his car parts factory, Moon Seung urged the president to balance his goals with the struggles facing Korean businesses.

“My message,” he said, “is slow down.”

Su-Hyun Lee contributed reporting.


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