Major economic growth indicators went south in August. According to Statistics Korea, retail sales, facility investment and completed construction in August decreased 1 percent, 0.3 percent and 2 percent, respectively, from a month earlier. The average manufacturing operation ratio dropped 1.1 percentage points from July. Industrial production showed a zero percent increase.
While most developed economies are booming, South Korea is struggling with economic contraction.
According to the Organization for Economic Cooperation and Development, the year-on-year economic growth rate of South Korea almost halved from 1.1 percent in the first quarter to 0.6 percent in the second quarter. The average OECD growth rate rose from 0.5 percent to 0.7 percent, with the US economy growing from 0.3 percent to 0.8 percent.
Except for the booming semiconductor sector, most South Korean industries including automobiles and shipbuilding are in a bad shape.
Although the government has tried to stimulate the economy with an 11 trillion won ($9.6 billion) revised supplementary budget, its growth indexes have fallen into negative territory. Something is going awry.
China’s economic retaliation against Korea over the deployment of an advanced US missile shield and national security risks are blamable to some extent, but it is hard to deny the adverse effects of internal factors such as economic government policies.
The Moon Jae-in administration vowed to realize income-led growth by creating more jobs in the public sector to pump private-sector growth. This is a demand-centered growth policy: If wage or income is raised through a fiscal injection, it will drive demand and economic growth, which will then raise wage or income again.
However, instead of the expected virtuous circle, the economy turned for the worse.
Labor-biased policies including a sharp rise in minimum wage put a damper on companies and self-employed businesses. Some manufacturers are considering overseas relocation for cheap labor. Cash-strapped small businesses are cutting down on employment to stay afloat.
An anti-business atmosphere marked by a plan to raise the corporate tax on large companies and measures to restrict franchisers’ business practices makes companies reluctant to make fresh investments.
Under these conditions, the economy can hardly pick up.
The surefire way to achieve a sustainable economic growth lies in revitalizing corporate activities.
The US government seeks to lower the corporate tax rate from 35 percent to 20 percent, while French President Emmanuel Macron signed decrees to reform labor laws.
But the Korean government has been going in the opposite direction.
With the economic red light flashing, President Moon instructed economy-related ministers in a recent Cabinet meeting, though belatedly, to start plans to help grow the economy through innovation.
Prime Minister Lee Nak-yon told them to push deregulation with extreme determination, comparing regulations to the “bulging waistline of a middle-aged man.”
From now on, the government must push for innovation-based growth.
The main player of growth through innovation is private companies. The government must foster an environment conducive to investment. Regulations hindering business activities should be relaxed boldly, while labor laws should be revised to give companies more freedom to fire employees for fair reasons. To make up for lost time, the government should speed up innovation support programs.
In addition, neither the government nor the ruling party has been saying anything about pending bills on service industry promotion and deregulation. It is about time they were in force.
The Chinese Communist Party announced guidelines emphasizing entrepreneurship last week.
It called for the protection of the property and managerial rights of businesspeople, the promotion of a social atmosphere respectful of them and the reflection of their opinions in new economic policies.
The guidelines indicate Beijing’s intention to propel Chinese economic growth through innovation.
Innovation-driven growth will be possible in an environment where private businesses innovate with the entrepreneurial spirit.
South Korea badly needs innovation-propelled growth. With its potential growth falling, entrepreneurship has been shrinking.
China is moving ahead at a dazzling speed in emerging industries such as electric vehicles and drones. There is little time to dither.