Wednesday, January 28, 2015

The government has a plan to prevent child abuse. Be afraid.

In case there are those of you who have not been paying attention to Korean news, people have been sent into fits of outrage over a spate of child abuse that has been reported around many of the country's daycare centers and nurseries.

In order to appear as though the government were doing something constructive (something that never ceases to instill fear in me), as it was reported in the Korea Herald, the Korean government plans to introduce a state-run qualification examination for daycare workers. Like as though Korea didn't have an excessive number of standardized exams already, the same article reported that the Korean government plans to require a set curriculum and a personality test for those who seek to take the national daycare exam.

And in the long term, the Ministry of Health and Welfare, which is overseeing this whole mess, plans to restrict the exam applications to those who major in child-related studies.

But will this help to end the spate of child abuse in the country's daycare centers? I remain unconvinced. Also, there are many other problems that the government's proposals can lead to.

1) Standardized Exams for Daycare Workers → One-Size-Fits-All Education

A standardized exam that will limit who can and who cannot work at a daycare center will also likely standardize daycare service itself. That is because those who are allowed to work in the daycare industry will eventually all have the same educational background and views. When a one-size-fits-all education model is then imposed on Korean students from the moment they learn to walk and talk, this could potentially further stunt Korean students' critical thinking abilities.

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2) Growing Role of Bureaucrats and Politicians

As the role of the government increases in how daycare centers operate, it will enlarge the role of bureaucrats and politicians. And any time the government gets involved in anything, there is almost always a glut of taxpayers' money. When there is that much “free money” available, it will further cement the destructive symbiotic relationship that already exists between bureaucrats and those people who run daycare centers. Skip to Number 8 on this list for more about this.

3) Standardized Personality Tests are likely to be ineffective

Setting up yet another standardized personality test, which this national day care exam will require, will not be helpful in any way. Does anyone think that this is somehow a novel idea? The Ministry of Defense has required Korean soldiers to take such tests for decades. In fact, while I served in the ROK Army, my battalion forced us to take these kinds of personality tests at least once every two months, which is standard practice throughout the ROK Armed Forces.

Yet those tests have done little to nothing to prevent suicides, desertion, murders, harassment, or hazing in the military. So why does anyone think that personality tests will somehow lead to a different result for the daycare industry?

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4) Surveillance cameras obviously haven't worked

The government also plans to force all child care facilities to install surveillance cameras, and threatened that those without cameras will be barred from operations in the future. However, I do not understand what this law will accomplish. After all, those people who have recently been arrested for abusing children were CAUGHT ON CAMERA!

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5) And who is going to pay for this?

The government plans to raise the number of assistant teachers at facilities to reduce the workload of daycare workers while improving the quality of daycare services. To be specific, the government plans to provide 6,500 assistant teachers nationwide and “all costs will be borne by the state.” Of course, when they say “the state,” what they really mean is “taxpayers.”

The government plans to earmark around 200 billion to 300 billion for the move. Of course, experience says that whenever governments say something will cost so much, it's a safe bet to assume that it will cost much more than that amount. Which is just perfect! Yet another reason for the government to whine about its tax deficit (here's an idea – how about just reducing spending?) and to impose yet more taxes on people! Like as though that hasn't been yet another mess!

6) Show me the data!

The government also plans to open an additional 450 public daycare centers nationwide by 2017. Aside from the need to impose further taxes on people and the other related problems that that could lead to, have people forgotten that Korea has one of the lowest birth rates in the world? Will opening so many daycare centers be profitable in the long run? Will the demand for daycare centers be consistent? If so, how long will it remain consistent? If it will remain profitable, how long will it be before the losses start? Will the losses be politically viable? Will it be economically sustainable?

Where is the cost-benefit analysis? All I see is a whole lot of nothing.

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7) Treating the Symptoms vs. Treating the Disease

This proposed law does not even seem to pretend to look to solve the cause of the problem. And what is the cause? The main cause for so many of the problems that exist within the daycare industry is that there isn't a single daycare center throughout Korea that is allowed to run as a for-profit business. In fact, every single daycare center, whether they are public daycare centers or privately-run daycare centers, is forced to operate as a non-profit because, as far as the Ministry of Health and Welfare is concerned, “the very idea of trying to make money while taking care of children is an anachronism in modern society.”

Yes, they actually said that. So if there is anyone who is reading this who happens to teach young children or happens to be a nanny, the Korean government's message to you seems to be to go screw yourselves. How dare you think that investing your time, energy, and soul into taking care of the children of others could mean that you deserve to make money, you greedy boor?

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In effect, the government has prohibited economic competition among the 45,000 or so daycare centers around the whole country. Some people might think that this is a good thing because parents are financially struggling and that, therefore, parents need all the help that they can get. However, what those people also seem to be forgetting is the maxim “you get what you pay for.”

As daycare centers are not allowed to run as for-profit institutions, they have no choice but to obey government diktats when it comes to pricing, services provided, etc. Therefore, as many of these daycare centers do not have the funds that they need to provide competitive services, many of them cannot afford to provide high quality amenities or teachers or service workers.

In an attempt to make everything equal, the government has made the entire industry, which happens to be the one of the industries that parents trust to take care of their young children, to become equally mediocre cesspools.

8) How to get Rich in the Daycare Industry

But does that mean that people who run daycare centers do not make money? Many do struggle to survive. However, there are those who do make money. Typically, I see nothing wrong with making money. However, in the case of some of these daycare centers, everyone ought to have a problem with the way they make money.

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As mentioned earlier, every single daycare center in Korea is forced to run as a non-profit. Therefore, they are one of the most regulated industries in the country. However, where there is regulation, there is always room for corruption.

Case in point, according to this article in the Sunday Newspaper, one of the easiest ways for a daycare center director to make a lot of money is by pilfering the children's lunch money. Firstly, as the government promised to provide “free” lunch meals to students, the government has to spend a total of ₩1,745 per child per meal per day.

The following are translations from that article about what some of the more unscrupulous daycare center directors do to make money:

  • Some daycare center directors make deals with the businesses that provide the meals that the children eat. To explain, the directors and the the food companies agree to create a separate bank account into which the government will allocate the promised lunch money. For example, if a daycare center has 100 students, the government will allocate ₩174,500 per day into that account. Assuming that the children attend the daycare center for twenty days out of a month, the government will allocate a total of ₩3,490,000 into the account.
The deal that the director and the food company will make is that the latter will provide only up to (for argument's sake) only 3,000,000 worth of food. The the two parties will split the remaining 490,000 among themselves.

  • Some daycare center directors also charge what they call “special expenses,” which are expenses that do not include English, art, or music lessons. These expenses can cost anywhere between 100,000 to 200,000 per child per month. It was reported that much of this money ends up becoming part of the directors' personal slush funds.

  • Some daycare centers also employ what are known as “ghost teachers.” After submitting fabricated documentation, instead of hiring actual teachers and daycare workers, some directors employ part-time workers. Some of them even employ their own family members. That is because the government provides subsidies for each teacher that a daycare center employs.

  • Some daycare centers also enroll what are known as “ghost children.” Currently, the government subsidizes daycare centers that have enrolled children. The government provides up to 394,000 per child who is less than a year old, 347,000 per child who is a year old, 286,000 per child who is two years old, and ₩220,000 per child who is between three to five years old.
Therefore, even though some daycare centers may be filled up and can no longer accept any more children, some daycare center directors still register even more children as having enrolled in their school. That way, the daycare center director will pocket that subsidy money, which he/she might split with the “ghost child's” parents.

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As I said earlier, where there is regulation, there is always room for corruption. Also, where there is regulation, there is always the possibility of mediocrity. In the case of the government's regulation of the country's daycare centers, there seems to be more than a lot of each to go around.

If the government truly wishes to improve the state of the country's daycare centers, the best thing that it can do is to lift all of its ridiculous regulations and allow them to compete like businesses ought to compete.

This state-run qualification examination for daycare workers will do nothing to solve the pre-existing problems of the industry, and will likely only make things even worse than they already are.

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Tuesday, January 13, 2015

Korea's Carbon Trading Market: Empty "Feel-Good" Politics

On January 12th 2015, in an effort to curb carbon dioxide emissions, Korea established the world's second largest carbon trading market. The government has decreed that this year's total carbon dioxide emission quota would amount to 1.59 billion tons. The government has also announced that the carbon emission quota would be imposed on 502 Korea-based companies.

According to the same article from The Korea Times, analysts estimated that the affected companies will have to spend nearly 12.7 trillion (US$11.71 billion) over the next three years to buy extra emission rights or to install carbon emission-reducing facilities.

Now the question is whether or not this will work. I, for one, have serious doubts.

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The world's largest carbon trading market was stared in 2005 and it is located in the European Union. The first phase of the carbon market, which lasted from 2005 to 2007, did not reduce carbon dioxide emissions. Instead, overall emissions increased 1.9 percent over that period.

But why would that be the case? It was because was “a surplus of allowances and international credits compared to emissions.” If this were a “natural” market, it would be easy to say that this oversupply of emission allowances was a result of market failure, which could be easily remedied by lowered prices. However, this is not a natural market. It was a market that was artificially created by the EU Emission Trading System (EU ETS), an intra-governmental agency.

So what happened? Politics happened. European politicians knew that cap-and-trade can be economically harmful. Especially due to the worldwide economic slowdown that began in 2008, no European politician wanted to go down in history as the one who deliberately exacerbated his or her country's unemployment woes. Case in point, even “good” European leaders like German Chancellor Angela Merkel thought that climate change politics must not trump jobs. Considering the economic gloom that has besieged Europe for the past few years, it should not come as a surprise that Chancellor Merkel was not alone in her opposition to stringent rules that dictated her country's economic productivity.

If a market that is imposed on the private sector is run by the government, there is always the possibility, nay assurance, that it will not be dictated by market forces, but rather by government diktats. Political convenience will always trump principles.

It was politics that failed the world's largest carbon trading market. There seems to be no reason whatsoever to suggest that Korean politicians will be any better than their European counterparts.

The irony! It BURNS!
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Subsidizing the Bad

Politics, of course, is not the exclusive domain of politicians. It goes without saying that corporate leaders also take part in it quite regularly through the form of lobbying.

The theory behind cap-and-trade has always been that that eventually, the government will reduce the availability of carbon permits, which will ensure scarcity. That way, the market will retain its value while at the same time forcing a reduction in the overall level of pollution. Then those businesses will further trade those permits with each other, thus forcing each actor to innovate and find new ways to produce less carbon dioxide emissions.

At least that's the theory.

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As mentioned earlier, a combination of industrial lobbying efforts and political impracticality have ensured that the the EU ETS granted more pollution rights to private firms than the polluters needed to cover their existing level of emissions. However, what makes it worse is that even before the rights were granted, the amount of pollution rights that the government considered to be allowable was calculated based on existing levels of pollution.

What that means is that those who have polluted the most in the past have been rewarded with the greatest subsidy. If that is not a backward way of doing things, not to mention unjust, then I do not know what is.

Will Korea avoid the mistakes that were made in Europe? I will always hope for the best, but I shall not bet the jeonse on it.

The Regulation of Everything

One of the most successful government acts that actually helped to reduce air pollution occurred in the United States. The Environmental Protection Agency began to regulate sulfur dioxide emissions, the gas that was most responsible for increased acid rain, in 1971. The world's first large scale cap-and-trade system was born in 1990 when the Clean Air Act was amended to create an allowance-trading program for sulfur dioxide.

By all measures, the creation of the sulfur dioxide cap-and-trade market has been viewed as a great success. As a result, many people who champion carbon cap-and-trade markets often point to the former as a way for the latter to go forward.

However, what people often don't realize is that that is like comparing apples and oranges.

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The most important difference is that when the American government tried to regulate sulfur dioxide emissions via its cap-and-trade system, only 110 coal-fired power plants were included in the system, which later expanded to 445 plants.

Then there is also the fact that long before the Environmental Protection Agency came around to creating the world's first cap-and-trade market, coal-fired power plants already had many low-cost options to reduce sulfur dioxide emissions without reducing electricity production. In other words, the technology that was needed to reduce sulfur dioxide already existed and was already underway in the private sector even before the Johnny-come-lately government entered the market. On the other hand, unlike sulfur dioxide emissions, an economically viable technology that helps to reduce carbon dioxide emissions does not yet exist.

Furthermore, unlike sulfur dioxide, which is industry-specific, carbon dioxide is emitted by everything and everyone. The biggest producers of carbon dioxide may be easy to point to – automobiles, electricity production, oil processing plants, and farms just to name a few. Unfortunately, however, that list includes millions of businesses, non-profit organizations, and even just ordinary individuals.

The Korean government may have picked out the largest 500 companies to impose its cap-and-trade system. However, there is no way that it can succeed in achieving its goals if it does not regulate everyone. Of course, the real problem with it is that it cannot regulate everyone. The government is neither omnipotent nor omniscient. Regulating everyone is simply impossible.

That's why I can sleep at night - the knowledge that as much as the government can try, it can't regulate everything
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Minimal Impact

For the sake of argument, however, let us presume that Korea's carbon trading market does work the way it is advertized and it does become successful. Then the question that has to be asked is how that success would be measured.

It is estimated that Korea produces approximately 630,000 kilo-tonnes of carbon dioxide per year, or about 1.69% of the world's total carbon dioxide emissions. On the other hand, China produces 10,330,000 kilo-tonnes and Russia produces 1,800,000 kilo-tonnes. Japan produces 1,360,000 kilo-tonnes and the United States produces 5,300,000 kilo-tonnes.

Korea is truly a shrimp that is surrounded by whales. The following link provides a “carbon atlas” of the world.

Even if Korea somehow manages to successfully stop using fossil fuels completely, it will not change the fact that other countries around the world will pick up Korea's slack in no time. After all, the world's largest consumers of fossil fuels are developing economies.

In other words, Korea's domestic cap-and-trade system will most likely have a virtually unnoticeable effect on global warming while imposing substantial costs on all Korean businesses and households.

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The Tragedy of Unintended Consequences

Again, for the sake of argument, we have to assume that the carbon trading market will be successful.

It is no secret that coal is one of the dirtiest ways to produce energy. However, as coal is relatively cheaper than other fuel sources, much of Korea's businesses rely on coal for their electrical needs. In fact, Korea is the fourth largest net-importer of coal in the world. Though this might not occur immediately, as natural gas is a cleaner alternative to coal, and especially considering the recent tumble in oil prices, it will only be a matter of time before Korean businesses will begin to rely on natural gas as a substitute for coal.

Oil prices have fallen in recent months and Saudi Prince Alwaleed bin Talal recently said that the world will never again see the price of oil rise to US$100-a-barrel. That might offer some comfort for Korean manufacturers. However, even if the prince is right, the law of supply-and-demand states that when demand goes up, ceteris paribus, the price will also go up.

As the price of natural gas goes up and coal remains undesirable due to its high carbon dioxide emission rates, Korean businesses will become less competitive. Seeing how Korea is already facing an uphill battle in maintaining its edge in the manufacturing industry vis-à-vis China, Japan, India, and other emerging Southeast Asian economies; not to mention Korea's aging population and low birth rate, this new cap-and-trade system will hurt Korean manufacturers' profit margins even further.

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And when a business' profit margins start to shrink, one of the first things that a business usually tends to do is lay off workers.

The rise in the price of natural gas, which is coupled by a decrease in demand for coal, will do more than hurt manufacturers, unfortunately. It will also affect average citizens as it will become increasingly expensive to cool and heat people's homes or to fuel their cars. It goes without saying that this will hurt the most vulnerable members of society, the elderly and the poor, more than it will affect anyone else.

Furthermore, as regulations will force businesses to be more mindful of carbon emissions, businesses will have no choice but to spend more money on carbon trapping technologies, which will lead to higher prices. And when prices go up, consumers buy less. It is a vicious cycle. It is also common sense, which many policymakers seem to lack.


The cap-and-trade system for carbon dioxide emissions has been a miserable failure in Europe and has been a political non-starter in the United States. There were good reasons for this.

Cap-and-trade may have been started with the best of intentions. In practice, however, it has turned out to be little more than empty feel-good politics. It is a noble failure that succeeds in doing only one thing – showing the rest of the world that people care, and are willing to do something about protecting Mother Earth. Never mind that the something that they are doing is, to use an understatement, counterproductive.

If only feeling good about oneself could solve all of the world's problems...
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Sunday, January 4, 2015

Korea - The Country of the Future

On December 18th 2014, IKEA, the world's largest furniture retailer, opened its first Korean branch in Gwangmyeong, Gyeonggi Province. The store is 25,759 square-meters (approximately 277,267 square-feet) in size and it is accessible via train and three inter-city express highways.

It would appear that IKEA's business is booming. So much so that the THREE inter-city express highways that lead to IKEA are congested with cars – all of them customers who want to buy their next furniture item from IKEA.

Apparently, doing well in business is not always a good thing. A little over two weeks after IKEA opened its doors to the public, the Gwangmyeong Municipal City has demanded that IKEA come up with a “dramatic breakthrough” by January 7th 2015 to resolve the problem of the congested roads. The municipal government threatened that if IKEA fails to come up with a solution by that date, the government would withdraw the temporary approval that it gave to IKEA to operate in its city, thus forcing IKEA to shut its doors starting on January 15th 2015.

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The Gwangmyeong Municipal City is also pressing the central government to have IKEA registered as a large-scale discount mall, which is currently registered as a mall specializing in furniture. This registration change would force IKEA to shut its doors twice a month on weekends.

Never mind the fact that the Seoul High Court already ruled that that particular regulation was unlawful because “it was difficult to judge if the rules actually helped smaller retailers while limiting consumers' choice at the same time.”

What is the government proposing that IKEA does? Should IKEA stop being a furniture retailer for a few years and re-brand itself as a construction company that specializes in road expansion? Or should it be a railroad company that focuses on adding and updating Korea's railway system? Or should it be forced to expand its already huge parking lot, which can house up to 2,000 vehicles?

Or should IKEA be forced to raise its prices? That way, consumers will just stop going to IKEA. Oh, wait. IKEA was already investigated by the Fair Trade Commission for “charging South Korean customers more than it charges buyers in other countries” even before it opened!

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President Park Geun-hye can wax poetic about transforming Korea into a creative economy until her face turns blue. The reality that is Korea's economy says that the government's rhetoric is just that. Considering the latest attack on IKEA, the Seoul Metropolitan Government's persecution of Uber, Korea's ridiculous tariffs on agricultural imports, Korea's inability to overturn its anachronistic internet laws, Koreans' overall mercantile mindset, and many other illiberal and anti-globalization tendencies, it is hardly surprising that half of all foreign firms based in Korea plan on leaving Korea sooner rather than later.

Charles de Gaulle was purported to have once said, “Brazil is the country of the future... and always will be.” Though I am not sure if Charles de Gaulle really did say it, regardless of the authenticity of the source, I cannot think of a more curse-like compliment than that. After all, it is another way of saying that an entire country is forever destined never to fulfill its huge potential.

Unless there is a real structural economic reform and a genuine change in the Korean people's attitudes about free trade, and soon, there is a good chance that that epithet will not apply only to Brazil.

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