The income-led growth policy outlined by the Moon Jae-in administration is quite different from former economic paradigms.
The previous governments stressed large companies and exports to grow the economy, create jobs and increase household income.
On the other hand, the Moon government calls for increasing household income and creating jobs through fiscal expenditure, expecting these to lead growth.
Its policies include sharply raising the minimum wage to 10,000 won; hiring 810,000 people in the public sector; converting all irregular outsourced workers to regular staff; giving allowances to preschoolers; and raising basic pension payments for seniors.
The Moon administration has a point in arguing that it is time to shift the nation’s economic growth paradigm.
The Korean economic growth rate has dropped by 0.26 percentage points on average each year after the financial crisis of 1997. Since 2012, it has not risen above 2 percent, except in 2014.
There is little doubt that as an economy matures, its growth slows, but the slowdown of Korea’s economic growth was too fast.
Polarization has also deepened. In one measure of the inequality of income distribution, Korea’s top 20 percent of households had 5.45 times more income than the bottom 20 percent, up from 5.41 in 2014 to 5.45 last year.
Income-led growth looks to create a virtuous circle in which taxes are spent to create public-sector jobs and increase household incomes, which will boost consumption, then production and investment, inducing private-sector job creation and increasing tax revenue.
The government plans to maintain the increase rate of fiscal expenditure over the nominal growth rate for five years to set up the virtuous circle.
But the money needed for fiscal expansion will not come easy, as tax increases and expenditure restructuring have to be endured.
The government and ruling party are looking at raising taxes on the highest income earners and largest companies. But prudence is required, as tax hikes would have a wide impact on the economy.
Another problem is that tax increases from a small portion of the economy not be enough to cover the increase in fiscal expenditures. Therefore, the government is likely to have to raise taxes on a wider range of income groups or issue national bonds.
On the other hand, bond issuance could cause snowballing fiscal deficits, which would burden the next government and future generations.
The most worrisome aspect of the Moon government’s economic paradigm is the paucity of policies to promote corporate vitality.
After the economy is pump-primed, growth should be led by the private sector. Basically, households are not producers but consumers.
In Korea, growth has been propelled by exports rather than domestic consumption. If growth is to be driven by household income, the domestic market should be large, but that is not the case with Korea.
The virtuous circle of growth can be sustained only if income keeps being generated through corporate activities, not through taxpayers’ money.
The Moon administration should not forget that one of the major functions of the government is to foster an environment for companies to find new growth. To do so, obstacles to corporate investments should be eliminated.
Countries struggling to revive their economies have pushed labor reform and deregulation. But these are nowhere to be found in the Moon administration’s economic blueprint.
There is persistent criticism that the highly paid workers of large manufacturers have widened the wage gap with parts suppliers by demanding wage hikes each year regardless of economic conditions. Their habitual strikes have also driven out investment.
Regulations for fair competition are important, but a lot of regulations are still suppressing corporate activities.
The government needs to consider the suggestion by Kim In-ho, chairman of the Korea International Trade Association, that Moon install a bulletin board of deregulation progress next to the monitors showing employment data in his office.
Income-led growth may end up as fiscal waste without deregulation and doing away with labor evils.