While much of the world’s attention is fixated on North Korea and its nuclear ambitions, something with the potential to be equally globe-rattling is taking place, generally unnoticed, in South Korea. There, new President Moon Jae-in is charting an entirely contrary course in economic policy than much of the rest of the developed world. If successful, the experiment could alter how governments tackle the most challenging problems of our day.
Moon is embarking on a highly liberal economic program -- and unapologetically at that -- that’s heavily dependent on the kind of taxing and spending conservatives loathe. The goal is to boost household income, workers’ welfare and small businesses. As the Ministry of Strategy and Finance outlined in a July statement, Moon intends to raise wages, build more public housing and increase unemployment insurance and other benefits to widen the social safety net. Education spending will be beefed up; so will job training programs. To pay for all this, Moon plans to raise taxes on the wealthy.
He’s already made progress since winning the presidency only four months ago. Moon quickly introduced a fiscal stimulus package to increase the number of public-sector workers, expand the social security system, fund startups and subsidize employment at small enterprises. Then he proposed a record budget for 2018. In July, his administration announced a 16 percent hike in the minimum wage, the biggest leap since 2001.
This agenda runs counter to current economic wisdom. Politicians throughout the developed world argue that the only way to boost growth and create jobs is to withdraw the state from the economy -- slashing taxes, spending and regulation. Even in France, that bastion of welfare-state socialism, President Emmanuel Macron has proposed loosening up the country’s vaunted labor laws. Where progressive experiments have gone ahead -- such as Seattle’s efforts to hike minimum wages -- they’ve generally been limited and local.
That’s precisely why Moon’s experiment is so worth watching, since the results could help determine which side is right. South Korea is an especially fitting crucible. The country is confronting many of the same woes that plague other rich nations. The income gap, while not as severe as in the US, has widened significantly since the early 1990s. Wage increases have been feeble, while productivity gains have tapered off. And then there’s Korea’s rapidly aging population. The International Monetary Fund warned in a January report that Korea faces a demographic crisis as bad as Japan’s, threatening future growth.
At the same time, the Korean economy boasts certain strengths that could make Moon’s job easier. Government finances are in such good shape that Moon can afford a bit more fiscal spending, unlike many of his Western counterparts. Korea’s government debt is not even 39 percent of its national output, compared with 107 percent in the US. Korea also never built out a weighty welfare state similar to those in Western Europe; it ranks near the bottom in public social spending among Organization for Economic Cooperation and Development countries. Strengthening the safety net could thus free up workers from the need to care for elderly parents, expanding the labor force.
Koreans, too, may be particularly receptive to Moon’s program. They’re arguably more sensitive than, say, Americans are to the idea that their fellow citizens are getting left behind; mass layoffs and high unemployment are still considered socially unacceptable. That gives Moon sizable political capital; he won election handily.
Will his policies work? Many of them make good sense. Some of Moon’s new public spending is earmarked to widen access to child daycare, which he hopes will encourage more women to join the workforce, and to enhance job opportunities for unemployed youth. Both are critical steps to offset the drag from an aging population. Raising wages and providing more generous government services could lift household income and thus unleash greater consumption. And better education and job training could help South Korea maintain its innovative edge over a rapidly ascending China.
At the same time, Moon is no anti-capitalist radical; he’s striving for a balance between supporting workers and business. He favors free-trade deals and he has been a die-hard defender of Korea’s pact with the US, which has come under fire from US President Donald Trump. Moon has also vowed to close down “zombie” companies kept alive by the state and banks and to enforce freer competition by cracking down on unfair business practices -- all of which should theoretically be good for productivity.
South Korea has successfully defied the economic consensus before, when it embraced global trade to propel industrialization rather than turning inward like many other postcolonial nations; exports powered its decadeslong rise into the ranks of rich nations. Now, instead of paying lip service to the plight of the middle class, Moon is trying to tilt the scales in its favor. We should hope South Korea proves the naysayers wrong again.
By Michael Schuman
Michael Schuman is a journalist based in Beijing. -- Ed.
(Bloomberg)
