May. 15. 2022
Business resilience: the only way out of a multifaceted economic crisis
Government urged to ease regulations and reduce corporate taxes
This is the third in a series of expert contributions aimed at shedding light on various issues that President Yoon Suk-yeol and his administration are expected to address during his presidency. – ED.
By Kwon Tae Shin
The new administration will face a confluence of crises ― supply chain disruptions, rising protectionism and nationalism, Russia’s invasion of Ukraine, tightening US monetary policies, slow economic growth in China and a series other simultaneous global shocks ― which together could trigger an economic crisis of unimaginable proportions. The South Korean economy, which is export-oriented and highly dependent on imports of raw materials, is particularly exposed to exogenous shocks.
Unfortunately, the new administration has few macroeconomic tools at its disposal due to the lack of fiscal firepower in the face of the debt snowball effect and the financial vulnerability of the private sector, which would not be able to absorb the shock of an aggressive rise in interest rates.
|Kwon Tae-shin, Vice President and CEO of the Federation of Korean Industries|
This is largely attributable to faulty economic policies, including income-led growth initiatives implemented over the past five years that have severely shaken the country’s economic fundamentals. The huge 41.6% increase in the minimum wage and the granting of regular status to irregular workers have, I believe, hindered employment in the private sector and reduced the quality of employment.
Exorbitant regulations, high tax burdens and strong labor unions have only led to the overseas exodus of Korean companies. Over the past five years, foreign direct investment (FDI) outflow from Korean companies reached $294.4 billion, about four times the FDI inflow ($74.5 billion). The consequences of the fiscal stimulus driven primarily by populism and garnering more votes are unmistakable: Sovereign debt has reached an all-time high, exceeding 1 trillion won, and the country’s debt-to-GDP ratio has exceeded 50% .
The new administration is tasked with overcoming the obstacles posed by this multi-faceted economic crisis. What should the government do?
The answer lies in a paradigm shift towards market-driven and business-driven growth, underpinned by autonomy, creativity and competitiveness. An impending stagflation environment, characterized by high inflation rates and economic stagnation, renders macroeconomic policies ineffective. Promoting corporate autonomy and competition to identify new growth industries and expand investment will increase the total output of the economy, which in turn will stabilize inflation rates and raise output levels. This is the solution to avoid stagflation.
More specifically, market-oriented policies should aim to motivate businesses and stimulate entrepreneurship. Regulations on large-cap companies and growing anti-business sentiment have stifled entrepreneurship, so much so that Korea ranks 27th among OECD countries in terms of entrepreneurial prospects.
A major overhaul is needed of regulations that persecute large corporations simply for their size in order to create a social atmosphere in which business owners feel respected, because it is businesses that create jobs through solid investments.
In addition, regulation must be conducive to the promotion of new industries. In this vein, regulatory reforms are needed to move away from positive rules (prohibition in principle and authorization by exception) in favor of a negative scheme (authorization in principle and prohibition by exception) to allow new industries, such as drones and robots, to thrive. South Korea’s anachronistic labor market practices are also a drag on national competitiveness.
According to the IMF, OECD, WEF, IMD and other international organizations, South Korea has a rigid labor market with its two-thirds. Demands for higher wages that disrupt productivity are at the heart of long-running labor disputes. The walkouts have been so frequent that an average of 38.7 working days are lost each year (193.5 times more than in Japan), and companies have suffered 4 trillion won in lost production over the past last five years.
Finally, tax reforms are imperative to boost business competitiveness, which in turn will generate jobs, especially as businesses increasingly consider relocating in light of the production bottlenecks caused by supply chain disruptions and ongoing tensions between the United States and China.
The new government must lower the top corporate income tax rate (currently at 25%) and extend government tax credits for large business R&D programs on par with competitors such as the United States. States, Japan and Germany, which offer them to all companies.
The good news is that the new administration believes that a strong market economy must prevail. We hope that policies based on autonomy and competition will be implemented to build a dynamic market economy where businesses are free to reach their full potential. This is the only way to overcome these multifaceted challenges and put the economy on the path to prosperity.
The writer is vice president and CEO of the Federation of Korean Industries.