Bad timing

By John Burton

The landslide victory for President Moon Jae-in's party in local elections last month has promised to give momentum to his ambitious economic reforms. But the recent backlash against such populist measures as raising the minimum wage suggests he still faces a tough fight in implementing them.

Small business owners, including operators of inexpensive restaurants and mom-and-pop shops, are complaining that Moon's election pledge to raise the minimum wage to 10,000 won an hour by 2020 will depress their profits and threaten their livelihoods when they are already struggling to survive. The government recently said it would increase the minimum wage by 10.9 percent to 8,350 won next year after raising it by 16.4 percent this year.

Although Moon introduced the measure to appeal to his lower middle-class supporters, it could still backfire among voters when parliamentary elections are held in 2020. One reason is that small businesses in the retail and restaurant sectors are likely to shed jobs to keep afloat in the face of the rapid wage increase, driving up the unemployment rate as a result.

Some workers are also protesting that the move this month to slash Korea's notoriously long work week to 52 hours per week from 68 hours is causing their incomes to fall as businesses are closing earlier instead of hiring additional staff due to the higher wages.

Moon came into office promising to be a "jobs president" who would cut high unemployment among the young while addressing growing inequality by boosting wages. His "income-led growth" policy involves not only an increase in the minimum wage, but adding more government jobs and hiking social spending.

The goal is to promote domestic consumption as workers receive fatter pay checks, while giving Koreans more leisure time ― perhaps in the hope that they will use it to increase the country's dismally low birthrate.

But the reforms are having the opposite effect by deterring investment and job creation. The impact is greatest among Moon's core working class constituency. Household income for the lowest 20 percent fell 8 percent in the first quarter from a year earlier, the sharpest decline since 2003.

Job creation is at its slowest pace since the 2008 financial crisis despite Moon's hopes that rising wages would increase consumer demand and result in more new jobs. Unions are urging Moon to grant subsidies to small businesses and provide tax credits to low-income earners to tide them over.

The Organization of Economic Cooperation and Development (OECD) recently warned in its latest survey on Korea that structural reforms are needed to boost productivity to underpin the economic reforms.

It criticized the proposed rapid increase in the minimum wage over three years. "Unless this is matched by higher productivity, it could push inflation above its target and have a negative impact on Korea's international competitiveness," it said.

Moon's plans to boost domestic demand are also threatened by Korea's household debt, which is one of the highest among developed countries. This poses a serious risk to economic growth. Moon wants to curb the increase in household debt by tightening lending standards for borrowers.

For the moment, household debtors are enjoying low interest rates since inflation is subdued. But that could change if the Bank of Korea starts raising interest rates to match the aggressive hiking of U.S. interest rates to prevent significant capital outflows.

The central bank might also be forced to increase interest rates if inflation rises due to a global spike in energy prices, with Korea being a big importer of oil.

In addition, the OECD recommended that Korea should raise its value-added tax to finance social welfare spending for the rapidly aging population. It said that the hike in corporate taxes to fund social programs was counterproductive because it discouraged hiring and investment. But Moon supporters are likely to complain that higher VAT rates would harm their spending power.

The introduction of Moon's reforms is coinciding with several other negative trends that bode ill for the country's economy. The biggest concern is that Korea could become caught up in the trade war between China and America. Seoul fears that high U.S. tariffs on Chinese home appliances, computers and telecoms equipment will cut Korean exports of product components, such as semiconductors, to China, its biggest overseas market.

Korea's export growth is already slowing and the country could face new headwinds if the U.S., for example, imposes tariffs on imports of car and auto components on "national security grounds," including those from Korea. Economic growth is already expected to fall short of the government's target of 3 percent for this year.

Moon's domestic economic reforms might be moves in the right direction in the long-term. But they still could fall foul of circumstances in the near-term.

John Burton (johnburtonft@yahoo.com), a former Korea correspondent for the Financial Times, is now a Washington, D.C.-based journalist and consultant.