[The Korea Herald] Should Koreans work less?

By John Power

It’s no secret that Koreans work the longest hours of any developed nation. In 2010, each worker put in an average of 2,111 hours. Workers in Korea also take some of the fewest holidays. Just 53 percent take all of their holiday time, compared to 89 percent of the French, according to a 2010 poll by IPSO. On the back of this work ethic, Korea has risen from poverty to become the world’s 13th-largest economy. But after decades of strong economic growth and rising prosperity, employees and policymakers are paying increasing attention to quality of life.

In a recent survey of Seoul workers by online information provider PayOpen and Korea Research, 41.1 percent of respondents choose leisure time as a factor in deciding whether to accept a job, closely following the proportion that chose salary, 45.8 percent. According to Statistics Korea, 65.8 percent of Koreans used leisure facilities in the year between July 2010 and July 2011, while 58.6 percent saw cultural, artistic or sports events on at least one occasion. At the same time, just 32.1 percent of Koreans were satisfied with their leisure, with finances cited as the biggest reason.

And despite remaining top of the international tables, Koreans’ work hours are at something of a low-water mark, having fallen steadily since the introduction of a five-day, 40-hour work week in 2004.

Offices remain lit up into the night in Yeoido, Seoul’s finacial district. The nation’s demanding work culture means that many employees work way beyond regular office hours. (The Korea Herald)

“The force, you may call it a cultural force, is increasing to enjoy leisure because of the family, because of the children, because of the school kids, so probably the resistance (to working shorter hours) at the moment in the long run will be reduced,” Kim Yong-hak , a sociology professor at Yonsei University, told the Korea Herald.

Changing attitudes

Different work and leisure expectations among the younger generation in particular have driven this trend, he said.

“At 5 o’clock or 6 o’clock they want to go home even though there is some leftover work. Previously, maybe 10 years ago, it was unimaginable in Korean companies, but the younger generations refuse to … overwork,” Kim said.

“They all claim this 15-day law-protected vacation period. But previously they did not go on vacation but now they are enjoying this vacation more and more. So, statistics show that the leisure industry is growing rapidly.”

Other factors, such as the abolishment of school on Saturdays, has further contributed to a greater focus on time away from work, he added.

While they put in far more hours than their international peers, Korean workers ranked just 24th for productivity among OCED-country employees in 2010. In 2011, labor productivity, or GDP per hours worked at current prices, was just 46.5 percent of that of the U.S.

“Especially labor productivity in wholesale and retail, restaurants, hotels is so weak due to it being the traditional service sector in Korea as well as it being a labor-intensive sector,” said Rhee Keun-hee, a senior researcher at Korea Productivity Center.

“In addition, manufacturing is relatively innovative in terms of product innovation and process innovation, but not in services. It is characteristic of (the) service (industry) in general.”

Pyo Hak-kil, an economics professor at Seoul National University, attributes this poor productivity to overregulation and a lack of foreign competition in the service industry.

“(The) Korean economy is still in the catch-up stage and therefore, its productivity is lower than U.S., Japan, the OECD average and EU 15 average. … But it is getting better and it will as we move from low- technology products to high technology products following incremental comparative advantage and going up the competition ladder.”

President Lee Myung-bak and some labor experts believe that shorter working hours could have a positive effect on productivity and unemployment ― as well as people’s quality of life. Labor Minister Lee Chae-pil claimed in January that 5,200 jobs were created through a government crackdown on workplaces that violated working hours restrictions.

Unemployment

If employees work fewer hours, according to the ministry’s logic, companies are compelled to hire more workers to make up the loss. Similar rationale was put forward by the French government when it introduced a 35-hour working week in 2000, though its effects remain contentious.

“The mega trend of Korean society is to reduce the work hours because of the high unemployment and of course there is a conflict between the labor aristocracy … labor aristocracy is those who are unionized with very strong power and with high pay and this labor aristocracy is having a conflict with less secure workers in Korea,” said Kim.

But despite the seemingly obvious attraction of fewer hours in the office, not all employees are keen to cut down. The Labor Ministry last month stepped back from a plan to include weekend work in the calculation of overtime, currently capped by law at 12 hours a week. Resistance came from both employers and employees, the former worried about increased labor costs, the latter reluctant to give up lucrative overtime pay. Minister Lee conceded that more time was needed for “study and discussion” of the issue, but insisted there was consensus among economy-related ministers on reducing work hours. Any such consensus is not present among economists.

Pyo, for one, believes the emphasis on a shorter work week is misplaced.

“Cutting Korea’s work hours would not be a solution because it reflects (the) social and corporate culture of work habit and standards of office work. Many factory workers are working overtime to secure extra compensation for their family budget needs.

“Their employers may find it better than trying to recruit new part-time or full-time workers because they can cut over-time work but cannot reduce extra workforce when business conditions deteriorate. In other words, the long working hours might have been (a) rational work practice by both employers and employees.”

Pyo is also skeptical of fewer work hours translating into more jobs.

“It would not be an effective way of boosting employment because most employers are afraid of increasing part-time and full-time employees since once they hire them, it is very difficult for them to lay-off some of them (because of) labor law and strong union activity. And factory automation and information and communications technology use in offices make employers save their labor costs rather than boosting the employment level.”

Inevitable trend

Nevertheless, the recent trend has been decisively one-way: away from the work-is-all mentality of the past. Kim sees the shift as inevitable, whether it should be welcomed or not.

“I cannot judge morally … but empirically speaking, that is an inevitable trend, it occurs everywhere in the world, in every country. As the economy grows rapidly and people have some wealth, then they begin to enjoy leisure. But Korean people … are still maybe the most hardworking (in the world).”

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[The Korea Herald ] How can Korea end poverty?

By John Power

Korea’s meteoric rise to prosperity since the 1960s is often cited as an almost unparalleled example of success in lifting a population out of poverty. But despite a vast improvement in living standards since the aftermath of the Korean War, poverty remains an everyday reality for a significant number of Koreans.

According to the Organization of Economic Cooperation and Development, 15.2 percent of Koreans earn below 50 percent of the median wage after taxes and government transfers.

Some of this poverty is relative, measured against the wealth of society as a whole, rather than reflecting people’s ability to make ends meet. Nevertheless, a widening gap between the richest and poorest has become a major concern of the public as well as the political classes.

Residents of Guryong shanty village live in the shadow of Seoul’s wealthy Gangnam district. (Park Hae-mook/The Korea Herald)

More striking for a developed country is the number of households in absolute poverty. According to a study by Korea Institute for Health and Social Affairs covering the years 2004-2009, 27 percent of households had seen their income fall below the absolute poverty level for a least one year, meaning they couldn’t meet the costs of basic goods.

Another statistic, from Statistics Korea, puts it that 2.11 million workers earned less than the minimum monthly wage of 858,990 won (about $770) in 2010.

Kim Kyo-seong, a professor at the School of Social Welfare at Chung-Ang University, believes the government underestimates the scale of poverty in the country, something reflected in its meager welfare provision.

“The government makes the problem worse or even they try to hide the exact number or exact scale of poverty (affected) households,” said Kim. “Only 5-6 percent of households or less can receive the benefits from the social security or social assistance programs. The government must make a more generous social assistance program and try to make more decent jobs … with adequate wages.”

Kim identifies a high percentage of irregular workers in particular as a major driver of poverty here. Last year, irregular workers made up more than 34 percent of the country’s workforce, according to official figures, high by OECD standards. Other estimates put the figure at more than 47 percent.

Elderly poverty also sets Korea apart from other wealthy countries: More than 45 percent of Korea’s elderly fall below the poverty line, compared to the OECD average of around 13 percent.

“The national pension scheme, the old-age pension for the general public, was introduced in 1988. So it is relatively young and there are not many people who are receiving the pension benefit,” said Koh Yong-sun, a researcher at Korea Development Institute.

In 2010, 2.3 million people received old-age pension benefits from the National Pension Service out of 19.1 million enrolled, according to Rand Population and Labor, a U.S.-based policy think tank. When the NPS was set up, it was envisaged that recipients with 40 years of contributions would receive 60 percent of their income in pension payments. Fiscal realties mean this proportion will be reduced to 40 percent by 2028.

With many low wage workers unable to make regular pension contributions, Kim said, securing their future financial security will be a particular challenge.

Solutions are often drawn along ideological lines. Where one school of thought tends toward direct government assistance, the other emphasizes economic growth in the hope of lifting living standards for all.

A 1998 paper by the KDI attributed a reduction in the absolute poverty rate from almost 41 percent of households in 1965 to 7.6 percent in 1991 to economic growth.

Another study by the Harvard Institute for International Development in 1997 concluded that 10 percent GDP growth results in an equal rise in income for the poorest 40 percent of the population. The study’s authors cited the experience of Korea as generally supporting this thesis.

Other factors have been shown to contribute to the reduction of poverty.

“Growth with Equity: Policy Lessons from the Experience of the Republic of Korea,” a paper from the KDI, estimates that “3.2 percentage points out of 5.9 percent real per capita income growth during 1960-1985 can be explained by educational achievement.”

The report goes on to state that educational opportunities should be increased for the poor to escape poverty.

Kim believes economic growth is far less important to alleviating poverty than government programs. Korea, he argues, should move toward the high-tax, universal-welfare model of the Scandinavian countries.

“As you see, our big companies like Samsung always make big a profit but we can never observe a trickle-down effect at all. They get everything. In that kind of economic world, it (growth) means nothing.”

Ewha Womans University professor and poverty researcher Sophie Lee agrees that economic growth cannot be the focus of poverty reduction policy.

“Korea now needs to move on from strongly believing that the trickle-down effect will still work, meaning that economic growth can be spread equally to reduce overall poverty. A more comprehensive welfare program is necessary, especially in Korea where the majority of work in the labor market is precarious,” said Lee.

While current welfare framework has the right components, said Koh, its reach and effectiveness need improvement.

“Basically, we have all the elements but the problems lies with the effectiveness of these programs. For example the unemployment insurance only covers a small part of the working population so I think we need to make efforts to expand coverage of these insurance programs and also need to increase the coverage of the public assistance programs,” he said.

In Kim’s view, however, boosting labor market participation and productivity in small domestic industries should be the priority of the government.

“We need greater emphasis on promoting labor market participation, especially of low-skilled laborers. … We are witnessing an increasing gap between various sectors, for example between the manufacturing sector and the service sector. And also we are seeing a widening gap between large corporations and small and medium-sized enterprises.

“The basic drive between this widening gap can be found in the productive growth in the manufacturing sector … while the domestic industries remain very uncompetitive because they are not exposed to foreign competition.”

Added to this, should be measures to train low-skilled workers, said Koh, who believes there is little the government can or should do about the size of the gap between the rich and poor itself.

“The government should make efforts to help low-skilled workers retrain themselves for example or to find better matches in the labor market. Currently the public employment service is rather weak … the spending, for example, is very small compared to other OECD countries.”

[The Korea Herald] Is Korea at risk of a housing bubble?

By John Power

The property market is stagnant and needs a jolt. At least, that’s the view of the government, which on May 10 announced measures to boost house sales, particularly in affluent areas of southern Seoul such as Gangnam, Songpa and Seocho.

Within days, however, real estate agents and market observers had labeled the measures, including lowering transaction taxes and easing lending rules, too modest to be effective.

If boosting weak property values is today’s concern, very different fears dominated discussion on real estate until relatively recently. This month two years ago, Hyundai Economic Research Institute warned of a catastrophic collapse of an inflated market without immediate government action. Economist Kim Kwang-soo, the head of think tank KS Economic Research Institute, made similar predictions, claiming that mortgage debt and speculative buying had led to a huge bubble the government could only hide for so long.

Real estate in Seoul’s Gangnam, one of the most expensive property areas in the country. (Yonhap News)

There is no single definition for what constitutes a bubble. Yale economics professor Robert J. Shiller, however, has defined it as an unsustainable rise in prices based on “exaggerated expectations of future price increases.”

Threat 

Although housing crashes tend to be more gradual than those on the stock market, they are more prolonged and cause more economic damage, according to a 2003 report by the International Monetary Fund. Heightening the threat is that a bubble is difficult to identify until well after it has burst.

In the midst of the dire predictions, house prices in 2010 were falling sharply, accelerating a downward trend that had begun in 2009. The growth in prices had peaked in 2006, when Seoul prices rose almost 20 percent, prompting the Roh Moo-hyun government to impose tighter lending rules and higher capital gains taxes to cool the market.

Park Moon-seo, an associate professor at the department of architecture of Seoul National University, said these measures were only partially successful, and could in fact end up contributing to a bubble and crash.

“Anti-speculation policies of the previous government were a half-success,” he said. “They were successful in terms of decreases in housing prices. At the same time, they were unsuccessful, as they have suppressed housing demand with non-natural market control, which accumulates its abnormal energy. Thus, they may result in a sudden rise of housing prices or bubble collapse in the future.”

Kim is much more forceful: There cannot be doubt that the market is already grossly inflated and heading toward a bust. When the bubble pops, he warned, the results could be even more catastrophic than the current situation in the United States or Greece.

“It is indisputable that there is a housing bubble risk in Korea,” said Kim. “The bubble first began with the sudden change in interest rate policy after the foreign exchange crisis in 2001, which caused a rise in speculation. And in order for banks to fund the boom in lending ―- due to speculation ― they borrowed foreign capital, causing a rise in household debt. And more debt means that people want to sell their houses. So, the government has ― in vain ― tried to solve this problem by investing vast amounts of money borrowed to fund its stimulative policies.”

Underscoring the severity of the situation, Kim said, is the fact that Korea’s disposable income-to-household debt ratio, at 165 percent, is the highest in the Organization of Economic Development and Cooperation. That house prices have been falling for several years and about two-thirds of the 50 biggest construction firms have gone bankrupt or are on the verge of bankruptcy is proof the collapse has already begun.

“Once a bubble has been created, the bursting of the bubble cannot be deterred,” said Kim. “It is an inevitable phenomenon, which was seen in the subprime mortgage crisis of the U.S., and in other nations as well such as Japan. These nations did not suffer from the bubble because they lacked expertise or money. And the same is taking place in Korea after the bubble was created.”

Evidence

What the government must do, according to Kim, is allow the bubble to burst naturally, at which point the government can provide financial assistance to those hit hardest, and wait for the market to correct itself.

Other observes make starkly different assessments. Kwon Joo-an, a researcher at the Korea Housing Institute, doesn’t believe the evidence points to a massively inflated market at all.

“When we look at the movement of house prices, the prices do not go down rapidly, which means that it is not a bubble or (is only) a little bubble,” he said.

Kwon sees the country’s high real estate prices as a consequence of high population densities in urban areas and a demand not met by supply. In his view, reinvigorating the moribund market should be the short-term priority of the government and the Bank of Korea, rather than resolving household debt.

In contrast to the previous government, the Lee Myung-bak administration has consistently tried to prop up the property market. This began in 2009 with the government purchasing 5 trillion won ($4.2 billion) worth of land and newly built unsold housing. The following year, lending rules were eased, tax exemptions extended and regulations on total debt-payment ratios in non-speculative areas abolished.

Last year saw further measures, with the lifting of a ban on quick sales in highly sought-after areas and a reduction in the levies on profits made on house sales by multiple property owners.

Park thinks that lower capital gains taxes as implemented by the current government should have a positive effect on the present market.

“Depending on the market situation, such a tax policy would effect either positively or negatively the market. Nowadays, it is believed that it is time to revitalize the market and increase the transaction volume. In this sense, lower taxes can have a positive effect on the market.”

Financial strife

In Kwon’s opinion, the lower capital gains tax policy is likely to have little effect on the market, for good or bad. Both Park and Kwon agree, however, that the market must be allowed to self-regulate to some degree.

“Demand management policy has faced its limit in effectiveness and the government must face the fact that the market has to be free in order to remain stable,” said Kwon.

With the cost of purchasing property closely related to the cost of borrowing, monetary policy is another significant variable in the movement of prices. Lower interest rates from the central bank typically boost housing demand, while higher rates do the reverse. On the BOK’s rate-setting policy, too, experts disagree.

“The Bank of Korea’s low interest policy is surely intended to boost the nation’s economy and housing market. As for house prices, such a policy can provide low incomers with a chance to buy their own house and at the same time fuel up speculation. Although monetary policies cannot be evaluated by simple mathematics, the current BOK policy seems to be appropriate, at least for the housing market, judging from the recent decreases in house prices,” said Park.

Kim sees it very differently: The BOK has only added fuel to the fire.

“The more the BOK or government tries to deter the bursting of the bubble, the worse the situation will become. Since 2008, the BOK has printed 150 trillion won. What began as household debt has become government debt and financial strife of public companies as well.”

[The Korea Herald] Is Korea soft on white collar crime?

By John Power

It is a common public perception: Korea is soft on white-collar crime, particularly when it involves high-level politicians, government officials or chaebol.

Speaking at the breach of trust case against Hanwha Group chairman Kim Seung-youn, an unnamed prosecutor implored the nation’s justice establishment to take a greater stand against corporate crime.

“If we continue to fail to punish (tycoons) for one reason or another, our society has no future,” the prosecutor said at the hearing at the start of February, demanding a nine-year prison term and 150 billion won ($134 million) in fines for Kim.

The recent history of criminal sanctions against chaebol heads could be said to lend credence to this view. A recent analysis by chaebol.com noted that not one of the seven heads among the top 10 chaebol sentenced to prison since 1990 has served jail time.

The business leaders, from Samsung Group, Hyundai Group, Doosan Group, Hanwa Group, SK Group and Hanjin Group, collectively received 22 years and six months in prison for crimes ranging from tax evasion to embezzlement. All, however, were given suspended sentences initially, later followed by a presidential pardon.

“I don’t know any other major country ― South Korea is an OECD member, a G20 member, the world’s seventh-largest exporter, you know, a big economy now ― where it is now routine for people, not just any old businessman, but the top people … (to) get convicted of stuff, (then) they hardly serve any time and the very next thing they are pardoned because they are so important to the economy,” said Aidan Foster-Carter, a long-time Korea observer based in the U.K.

Foster-Carter recently lashed the country’s attitude toward white collar crime in an Asia Times Online article entitled “The sleaze that shames Seoul.” In it, he took aim at an environment he saw as allowing big business act with impunity.

Among the examples listed were President Lee Myung-bak’s pardoning of Samsung Group chairman Lee Kun-hee, twice convicted of financial crimes, and the appointment of Hanwha chairman Kim, who had previous convictions for currency smuggling and assault before his current charges for embezzlement, to represent PyeongChang’s bid for the 2018 Winter Olympics.

“(It’s) the sort of sense that because they are so important they can do what they damn well please. Which again, I don’t think that is good for any country, is it, for anyone to have that sense they are above the law?” Foster-Carter said.

A sense that the powerful can escape justice is not just confined to the business world. The return of the superintendent of the Seoul Metropolitan Office of Education, Kwak No-hyun, to his post in January despite a conviction for bribing an electoral rival out of the race for the post prompted widespread criticism.

The use of the presidential pardon, too, has often been contentious, with critics charging that it is inevitably used for political purposes. Those in the political world to have benefitted from President Lee’s clemency have included the elder brother of former President Roh Moo-hyun, Roh Geon-pyeong, former Democratic Party National Assembly speaker Kim Won-ki and Suh Chung-won, a former lawmaker and close aide to Park Geun-hye.

Kim Woochan at the Korea Development Institute School of Public Policy and Management believes the current situation is untenable. When it comes to the courts, he says a major problem is judges’ tendency to consider the impact on the national economy in their sentencing, as in the cases of Samsung chairman Lee and Hyundai Group chairman Chung Mong-koo.

“They tend to mix what is legally right and wrong with how much a businessman is contributing to the Korea economy. They keep on considering the second factor and diluting their verdict. I also agree that there are some powerful people trying to get favors. They have influence so they somehow influence not only the judge’s verdict and the presidential pardon, but also even when making the laws they try to influence how the laws are made in their favor,” he said.

Aside from the ethical implications, arguments about how vital chaebol leaders are to the economy are outdated, according to Kim.

“In the old days, especially the founders of the chaebol, they were essential. We wouldn’t have those large corporations without those founders like Lee Byung-chull (the founder of Samsung) and Chung Ju-yung (the founder of Hyundai) and so on. But now we have second generation and third generation and compared to their fathers they are not really essential. I think Korean corporations can survive and even prosper without them,” he said.

Another part of the problem, as Kim sees it, is the cozy relationship between the legal system and business interests.

“Many of those judges and prosecutors, once they retire they become outside directors of Korean major corporations. Especially, because these are lawyers, they would become involved in the cases as … the lawyers for the defendant when they retire and they get heavy legal fees. Those are the practices that, I agree, it might give them incentives to be more lenient.”

But not everyone agrees that the legal system is lacking. Korea University law professor Kim Il-su says that Korean law is actually noticeably strict compared to other jurisdictions.

“I think the law system against white collar crime is sufficient to control such crimes. The sanctions against economic crimes in the special law seem to be a little bit punitive compared to the international standard,” Kim said.

This is a view supported by Yonsei law professor and “Corporate Compliance” author Jeong Young-cheol, who believes enforcement, rather than the laws on the books, is a matter of concern.

“If you look at the special laws on crime of breach of fiduciary duty/misappropriation of corporate funds, the maximum punishment is way too high,” said Jeong. “The amount of fines is also extreme. Again, sufficiently strong. The effectiveness is not always on the same level.”

Overall, Jeong says Korea has a decent record on tacking white-collar crime, one much improved upon from the past. In particular, he points to a soon-to-be-introduced compliance guardian system which will mandate compliance officers at large public companies to ensure adherence to the law.

“The legal and regulatory framework has done a fair job of cleaning up the business world and protecting the public. The number of insider trading criminal cases is similar to that in the United States. Although the Korean business is known to be corrupt, it is being improved. Compared to the past, the situation seems much better.”

Korea University’s Kim also argues that extenuating circumstances, including economic considerations, as in the examples of Samsung and Hyundai, are in fact relevant when it comes to sentencing.

“Those aforementioned cases were already cleared two years ago. When the cases were pending in the Court, the expected roles of CEOs from Samsung and Hyundai in supporting the organizing of the Winter Olympics in PyeongChang were necessary. Therefore, the Korean Court took the unusual circumstance into consideration.”

Recent examples show a tough approach to white-collar crime, Kim says, pointing to last month’s sentencing of former Taekwang Group chairman Lee Ho-jin to four-and-a-half years in prison for embezzlement and breach of trust.

While Yonsei University’s Jeong also points to an ever more rigorous legal environment, he accepts there remains room for improvement.

“We can do better. How? Try to prevent the crimes, try to make people believe norms are to be observed, try to make rules fair as everyone is ruled by the same law. We should be more focused on the preventive side of crimes than punishment side.”

Others, such as the KDI’s Kim, remain pessimistic about the likelihood of change.

“We thought that it was getting better but it doesn’t look that way anymore especially with Lee Kun-hee’s presidential pardon,” Kim said. “And corporate scandals involving family members do not seem to be ending.”

[The Korea Herald] Should big firms have to share profits?

The proposal that large firms be compelled to “share” their profits with suppliers was just one of many ideas put forth for a “fairer” economy near the end of the President Lee Myung-bak administration. Such proposals especially gathered steam with the general leftward shift of the political landscape after Park Won-soon’s victory in the Seoul mayoral election in October 2011.  — John.

By John Power

The concept of profit-sharing has been controversial since its announcement in early 2011 by Chung Un-chan, a former prime minister and current head of the Commission on Shared Growth for Large and Small Companies.

Chung, appointed by a President Lee Myung-bak desperate to shake off his pro-big business image, rankled conglomerates by proposing that some of their “excess” profits be directed toward the growth of small and medium-sized businesses. After complaints that the commission was trying to force profit-sharing, and a boycott of related negotiations by the Federation of Korean Industries, Chung and his colleagues earlier this month agreed on a watered-down system, renamed “cooperation benefit sharing.”

Under the system, which is voluntary unlike the earlier proposal, large companies may share their profits with suppliers based on prior agreements. The commission will then grade large companies on their support for smaller firms, with high-scoring companies benefiting from government incentives such as advantages in winning public orders. While avoiding the uproar of the initial proposal, big business representatives complained the measures were vague and agreed to without them. To many businesses and supporters of the free market, the idea of any such commission at all is worrisome.

Economic Reform Research Institute researcher Wi Pyoung-ryang, however, believes the commission is a necessary counter to chaebol dominance.

“Of course, the organization is positive and necessary in the Korean economic structure in order to narrow the profit gap between large and small companies, and revitalize small companies,” Wi told Voice.

While he “can’t judge” yet whether profit-sharing should be compulsory, Wi also believes that certain industries should be left to small and medium-sized businesses. As part of its mandate, the commission has “recommended” that conglomerates stay out of, or withdraw from, certain industries such as tofu and cardboard boxes.

“Some business territories should be left for small companies for short terms such as three-five years. With this, small companies can have their competitiveness,” said Wi.

Chairman Chung Un-chan of the Commission of Shared Growth Between Large and Small Companies (Yonhap News)

Oh Jeong-suk of the Small & Medium Business Corporation said that small businesses are currently facing a number of stern challenges in the current environment.

“There are three different types of difficulty, one is the financial problem. The second is the lack of manpower. The third one is marketing. Korea’s market is so small and we have go abroad to sell our products,” said Oh, who stressed that he was speaking in a personal capacity only.

Accordingly, Oh believes that small companies need to be given a chance to grow out from the shadow of large conglomerates.

“Thing is, many chaebol dominate all our industry. It is such a big dominance compared to other nations so I think government will play a role in that,” said Oh, adding that he would support forced profit-sharing “if it is necessary.”

“The chaebol make some of sort of franchise … every corner, every street and they open a small bakery store and then they can be able to profit from them. So there is no place to go for small business owners and self-employed in these times; so the government has to get involved to balance small business and the chaebol.”

Those representing big businesses are less enthusiastic about being told in what areas they should or shouldn’t expand.

Industries suitable for SMEs may not be unilaterally designated, but refer to business sectors that SMEs have a competitive edge over large companies, for example, customized suits, house beer, special glass, special vehicles etc,” said a high-level source within FKI who did not wish named.

“In addition, suitability on the market is determined by consumers. As technology develops, an industry that used to be suitable for large companies can also turn into a field suitable for SMEs and vice versa. Therefore, it is impossible to say that some businesses are suitable only for large companies and others are only for SMEs.”

Kwon Hyuk-cheol, the head of the market economy research team at the Center for Free Enterprise in Seoul, said that consumers will suffer if businesses are restricted from certain industries.

“Regardless of big business or small business, the one that best serves the consumer will survive. If a big business offers a product at a cheap price, that is a big benefit for a consumer. In order for businesses to best serve the needs of the consumer, competition is by all means necessary,” he said.

Kwon also questions the common assumption that big business can only expand to the detriment of smaller players.

“People say that when a big business advances, a small business is bankrupted but that is only reporting one side. It is true that small business in direct competition with big business will face challenges. However, through such competition, a small business with a competitive edge will grow and develop.

Furthermore, the advantage of learning to reorganize resources for increased efficiency should not be overlooked,” he said.

While even the KFI said “that the Commission of Shared Growth will play an important role in enhancing competitiveness of domestic industries and in strengthening and developing the national economy for all Korean citizens,”

Kwon doesn’t believe it has any legitimate function.

“The presence and activities of the Commission on Shared Growth for Large and Small Companies are entirely unnecessary. Big and small businesses alike should voluntarily strive for their growth. To force businesses to grow is a laughable matter. I do not think the Commission on Shared Growth for Large and Small Companies is more interested in the growth and development of small businesses than that of the big businesses,” he said.

But moves to restrict the growth of conglomerates in favor of small businesses haven’t just come from the commission on shared growth. The Democratic United Party recently announced a plan to ban affiliates of the top 10 chaebol from making investments in companies above 40 percent of their worth.

Some, such as civic group Citizens’ Coalition for Economic Justice, even believe such measures should go further.

“Target companies should be large companies whose total assets are more than 5 trillion won,” said a spokeswoman for CCEJ who did not wish to be named.

“However, the DUP only argues about the top 10 conglomerates. Secondly, we also argue that the investment limit (be) 25 percent, which is also different from the DUP’s proposal. The DUP argues for 40 percent. We (also) strongly argue that cross-holding should be prohibited, we mean a total ban.”

Ultimately, the question of whether to intervene in the market can be about practicality as much as ideology. Yonsei School of Management professor Shin Dong-youb recognizes the merits of profit-sharing but wonders about its feasibility.

“Profit-sharing in this form has a lot good purposes but it has a lot problems too so it should be examined quite carefully because profit sharing asks companies to reduce their profits so that others, for example suppliers and smaller companies, can increase profits,” Shin said.

“The general purpose itself is good but the practical way to make this kind of thing is quite a tough challenge.”

[The Korea Herald] Should Korea sign an FTA with China?

By John Power

Free trade agreements have been a cornerstone of Korean economic policy in recent years. Since Korea reached its first FTA with Chile in 2004, the country has signed deals with the European Union, Singapore, the Association of Southeast Asian Nations and, most recently, the U.S. Now attention has turned to the possibility of an FTA with the nation’s biggest trading partner of all, China.

On a state trip to Beijing earlier this month, President Lee Myung-bak said that official negotiations on a pact, first broached by the two countries in 2004, should begin in the next month or two. Building the government’s case, the Ministry of Foreign Affairs and Trade last week released a report claiming an FTA would boost exports to China and lead to new manufacturing jobs here.

Kim Young-gui, of the Korea Institute for International Economic Policy, says KIEP research bears out the benefits of a deal between the two economies, which saw trade of $224.8 billion in the first 11 months of 2011.

“It is known that the Korean economy has experienced high economic growth by pursuing export-oriented policies. Moreover, many countries have pursued further trade liberalization by agreeing on FTAs with one another. Therefore, FTAs are an inevitable strategy to Korea in the sense that Korea would lose a large share of the world market otherwise. If we consider direct positive effects from FTAs, as well as these opportunity costs of losing markets, it is widely agreed that the FTA is a fairly important and urgent agenda for the Korean economy,” Kim told Voice.

Kim notes that an FTA with China would likely have a greater impact than the one with the U.S passed at the National Assembly in November.

“What is interesting is that China has higher tariff and non-tariff barriers compared to Korea’s other trading partners such as the U.S. and the EU. This implies that the economic effects of tariff and non-tariff reduction through the Korea-China FTA would be greater than the Korea-U.S. FTA or Korea-EU FTA,” he said.

Korea’s tariff burden is also considerably lower than China’s, amplifying the potential of an FTA to benefit Korean exporters, according to a 2006 report by KIEP, which said the average tariff on goods imposed by Korea was 11.2 percent to China’s 56.9 percent.

A Korea-China FTA would also benefit consumers here, according to Dilip K. Das, a professor of SolBridge International School of Business at Woosong University.

President Lee Myung-bak met with Chinese President Hu Jintao in January to discuss a possible Korea-China FTA among other issues.

“The prices of foods in Korea should come down after the agreement. In Canada, my weekly grocery bill is about $22-25. Here my weekly grocery bill is around $80. Korean food prices are way too high. Looking at the wealth of the nation, these prices just don’t gel,” he said.

Das also believes an FTA could improve relations between the countries, especially in light of contentious incidents such as the recent killing of a Korean coast guard officer by Chinese fishermen.

“As you noticed during President Lee’s state visit to China, while this issue was discussed it did not overshadow the negotiations of the two parties, and they know that the two neighbors, or I repeat the two dynamic economies, have a lot going for them and there are far more important issues than this one incident which sort of could mar the relationship.”

The region’s recent economic history, Das says, has convinced countries of the advantages of easier trade.

“The Asian crisis changed everything because all these countries together had to fight this crisis and it weighed heavily on many countries including Korea, not so much China. And so they thought, OK, if we have to come to help each other at a time of economic distress, well why not get into FTAs and BTAs. And economically, in the regional economy, that’s what they started doing.”

But even before a single round of FTA negotiations has taken place, opposition has been strong. The main opposition Democratic United Party recently called on the government to halt plans for talks with China, with Floor Leader Kim Jin-pyo claiming the deal would have a “nuclear” impact on Korean farmers and fishermen. KIEP estimates that an agreement that lowered tariffs on agricultural products by 50 percent would cause up to $2.8 billion worth of damage to the local industry.

“We have to look at this scenario in its totality,” said Das, “that whenever an FTA is negotiated, there are some sectors that lose and they are some sectors that gain. And here in Korea it is the farming sector that would lose.”

DUP lawmaker Park Joo-sun says not enough information has yet become available for him to take a stance on the FTA, but he is adamant that it should not follow the example of the U.S. pact.

“Firstly, amending the law and system of Korea through a single FTA treaty should not be repeated. Secondly, products produced in Gaeseong Industrial Complex should be recognized as products of South Korea. Thirdly, effects on agriculture, livestock and fishing industries should be minimized through policies such as specifying sensitive products,” Park said.

Park says that a pact with China has the potential to be even more damaging to local agriculture than the Korea-U.S. FTA his party opposed in its previous incarnation as the Democratic Party.

“Agriculture, livestock and fishing industries should be dealt with extreme caution. Unlike the U.S., China produces the same agricultural products as South Korea does. Also, its geographical proximity eliminates concerns regarding freshness of the products which is the most important aspect of trading agricultural products. Furthermore, regarding the price competitiveness, Chinese agricultural products are overwhelming priced at 1/3-1/4 of the price of Korean products,” Park said.

Nam Hee-sob, who was a chief member of the policy committee of the Korean Alliance against the Korea-U.S. FTA, shares many of Park’s concerns.

“In general, the FTA is to reduce the tariffs which may lead to a reduction of prices. But I think it is just one side of the thing. I think it is meaningless to get a cheaper product at the expense of our food system. We cannot entirely rely on the Chinese food,” Nam said.

KIEP’s Kim, too, acknowledges that farmers would need to be compensated for their losses.

“It is also very important for the Korean government to make appropriate policies to share fruits from free trade and to help the people who would be unfavorably affected by the FTAs,” he said.

But Nam says that rather than seeking cheaper imports to tackle high food prices, the focus should be on reform of the local industry.

“We need to reform our domestic industry first and then if we can make mutual benefits with our trading partner in some specific products, then we can open our markets,” he said.

And while he accepts an FTA would benefit big exporters such as Samsung and Hyundai, Nam sees little benefits trickling down to the average person.

“The benefits they can get from exporting are not shared by the general public. Last year, I heard that Samsung made extra record profit but I haven’t heard any news that the ordinary people can have benefits from Samsung’s profit.”