Sunday, May 26, 2019

South Korea's Economy is in Deep Trouble

I am terrified about South Korea’s economic trajectory. As long as the US-China trade war persists and South Korea continues to be ruled by President Moon and his progressive government, I think South Korea’s economy will be ruined.

Firstly, while it’s true that South Korea’s economy has consistently grown over the past two decades, it’s also true that economic disparities are deeply rooted.

South Korea currently has 45 conglomerates that fit the traditional definition of a chaebol. 77% of South Korea’s leading businesses belong to the chaebol. Meanwhile, average South Koreans’ household income has been falling for years. Naturally, household debt has been going up simultaneously.

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Chaebols and the government have worked with each other for decades because they were designed to improve South Korea’s economy by producing goods and services to export. So, due to economic growth that was enjoyed by the rest of the world, the chaebols did well.

However, the rest of South Korea that didn’t/couldn’t make a living by exporting goods and services didn’t get so rich. In fact, South Korea’s domestic economy’s health (outside of chaebols) has always left much to be desired.

However, even though most small business owners would basically feed on scraps, as long as the chaebols were able to make lots of money, South Korea’s GDP continued to grow. But that’s changing. Now, even the chaebols are in trouble.

The first reason is the US-China trade war. At least for now, the trade war doesn’t look like it will end any time soon. This will impact China’s economic growth. China is South Korea’s largest trading partner. If China’s economy slows down, South Korea’s economy also slows down.

The second reason is US demand for imports is falling. For a long time, the Federal Reserve put interest rates at near 0%. However, since the end of 2015, fearing inflationary pressures, the Fed has gradually increased interest rates and are now at 2.5%.

Considering the fact that the US is at near full employment and its economy is growing, the Fed will not cut interest rates. This will dampen consumer spending. That means fewer exports for South Korea’s chaebols.

For an economy that depends on robust exports for its growth, the US-China trade war and high US interest rates combination spell bad news. Naturally, this will lead to reduced spending and investment by the chaebols. That in turn will lead to more unemployment.

Less spending also means businesses that depend on selling to the chaebols will see less business. As they don’t have much of a safety net, many will shut down. Fewer businesses means that landlords will see less income. Everyone will get affected. And it will be a vicious cycle.

Everywhere you go in South Korea, you can always see this sign, 임대문의.
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Meanwhile, President Moon Jae-in’s plans to improve the economy have ranged from ineffective to counterproductive. In fact, when 100 economists were asked about Moon’s economic policies, 35 of them gave him a D grade.

Moon’s economic plans can be categorized into three groups. Income-led economic growth, promotion of an equitable economy, and promoting the Fourth Industrial Revolution.

Income-led economic growth is a total bust. By hiking up minimum wage the way he did, small businesses began slashing their number of workers. This was entirely predictable, but Moon ignored common sense advice and pushed through this law at ramming speed.

Promoting the Fourth Industrial Revolution and innovation is nothing more than empty sloganeering. Tech innovation doesn’t necessarily have to mean terraforming Mars. But Kakao can’t even start a carpool service without heavy regulations.

In order for innovation to occur, politicians need to do away with out of date laws and regulations. They need to find ways to help people who fall victim to structural unemployment without hampering innovation. There is no such politician, Left or Right, in Korea.

When taxi drivers protested en masse against Kakao's plan to start a carpool service, the taxi drivers cheered when Liberty Party Korea Floor Leader Na Kyung Won appeared to speak in support of them. The LKP has historically been at odds with unions, but now it supports them. Meanwhile, prior to Na showing up, taxi drivers screamed, insulted, and threw water bottles at members of the ruling Democratic Party for not enthusiastically siding with them against Kakao.
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Basically, the political climate won’t allow any new businesses to come into existence in South Korea, lest it causes existing industries to suffer. South Korea’s economy was once compared to a dynamo. Not so much anymore.

Promoting an equitable economy means increasing welfare and government handouts. But this necessitates tax hikes. Income and corporate taxes have been raised. Indirect taxes, such as public transportation fares, energy prices, toll booths, etc. have either gone up or will go up.

Moon’s economic policies have not worked. In fact, they’ve backfired so hard that even the New York Times has had to admit that the policies they have favored in implementing in the US are not working.

Korea’s unemployment rates are deeply worrying. April’s jobless rate was the highest in 19 years. But if you dig deeper, those figures are even scarier.

11.5% of young people (from age 15-29), those that the minimum wage hike was meant to help, are unemployed. People in their 30s and 40s, who should be in their prime earning years, also saw spiked unemployment.

Those who did get more jobs were senior citizens (whose incomes are low and whose jobs tend to be boondoggles). The other group who saw more hires were health and social welfare service sectors. Because they’re part of the public sector growth policy Moon has pushed for.

This is bad. Economic growth depends on private sector jobs. Public sector jobs, on the other hand, come at the expense of private sector jobs. They also require tax monies.

All the while South Korea’s economy is going up in flames, the only other solution not yet mentioned that Moon is pushing for is the fantasy of some of kind of confederation between South and North Korea.

As long as North Korea refuses to give up its nuclear weapons, the US will not lift sanctions. That means the trans-Korean railroad project will never start and the chaebols will never spearhead economic development in North Korea.

For investment to happen, a business has to be able to hire, train, pay, and fire workers without excessive outside interference. They’d also need to be able to bring any profits they earn overseas back to their own country.

As long as Kim Jong Un and his regime remain in place, none of that will ever happen. Just ask Orascom.

By investing in North Korea now, all South Korean businesses would be doing is pouring money into a bottomless pit and making themselves hostages by going to North Korea.

South Korea’s economy is in deep trouble, but South Korean leaders don’t seem to have a clue as to what to do. God help us all.

During a press conference at the beginning of the year, a reporter asked President Moon where he got his confidence from when he said that he would not change his economic policies despite the fact that he said he knew that the people were unconvinced by his plans and unsure about their future. President Moon responded to the question by saying "I've already explained my positions for 30 minutes, so I don't think I need to answer that question."

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