The Moon Jae-in administration has clear economic policy guidelines: income-led growth, innovation-pulled growth and fair economy. What is also clear is that the guidelines are not working.
Recent economic developments point to the likelihood that the economy could become an Achilles’ heel of the otherwise robust, popular government. Indeed, there are red flags in the Korean economy, which forced the Bank of Korea to revise down its growth forecast for this year to 2.9 percent from 3 percent last week.
The central bank also put its forecast for 2019 at 2.8 percent, down by 0.1 percentage point from the previous one. The BOK’s decision reflected the latest economic trend, not least sluggish job creation and slowed exports.
The gloomy economic situation was evidenced by yet another grievous jobs report last week that showed the situation is the worst since the 2008 global financial crisis. The number of newly created job positions stood at around 100,000 in June for the fifth straight month -- compare this with the government’s goal of raising it to 320,000.
The latest jobs report also showed that the number of new jobs to be created this year is estimated to go down to below 200,000 this year, compared with 315,000 last year. Overall, the number of unemployed exceeded for a sixth consecutive month.
The bleak job market is attributed mainly to the sluggish manufacturing sector and a radical hike in the legal minimum wage.
The manufacturing sector shed 120,000 jobs last month, marking a decline for a third straight month and the worst record since the 2008 global financial crisis. It is hardly surprising news since traditionally strong industries like automobiles and shipbuilding are struggling to overcome hard times.
What is troubling is that the job situation is not improving despite all-out efforts by the Moon administration, which calls itself a “job-creating government.” Its efforts included the two supplementary budgets the Moon government has introduced to spur the economy and job market.
The government has been rolling out money from a 3.9 trillion won ($3.69 billion) extra budget since May, with the main aim of creating jobs for young people. It is the second of its kind under the Moon administration, following an 11 trillion-won supplementary budget introduced last year.
Exports that buttress the Korean economy are in trouble, too. Outbound shipments dropped 0.1 percent on-year in June, registering the second negative growth in 20 months.
A cause for greater concern is that the slowdown in exports comes amid an escalating trade war between China and the US, which are the largest- and second-largest trading partners of Korea, respectively.
Making matters worse are the US interest rate hike and China’s rise in major industries.
The hostile external conditions should not allow the government to make a faux pas in economic management. However, the way the government handles the legal minimum wage alone is a good case that shows the government is doing the opposite.
The Moon government raised the benchmark wage by 16.4 percent last year, touting it as a core element of its income-led growth. Moon and government officials insisted that wage increases would encourage domestic consumption and spur the growth of the national economy.
As it turned out, the negative impact is far greater than the positive, with small, self-employed businesses and the service sector bearing the brunt of higher labor costs. In June alone, 247,000 jobs for temporary workers and day laborers disappeared.
This year, the minimum wage was set at 8,350 won ($7.37), up 10.9 percent from 7.530 won. Officials say the decision reflected the government’s concerns about the negative effects of a rapid rise in the minimum wage, but the two-digit growth is still a big burden for small business operators and the self-employed who have demanded a freeze and adoption of flexible wages.
On Friday, one day before the decision of the minimum wage for next year, a nationwide group of convenience store owners and proprietors of small businesses held separate news conferences during which they demanded a change in the minimum wage policy, threatening collective action including joint closure of their businesses. They warned they could launch a “disobedience movement.”
The Moon government is facing a revolt by those who supported it in the presidential election a little over one year ago. It ought to redirect its economic policy line before it is too late and the economy becomes an Achilles’ heels.