Individual Thesis, Division of Economy

Signs of Japanification

In South Korean Economy – Threats and Efforts

Hoonjae Gwak

32nd Korea-Japan Student Forum

Department of Global Economics, Sungkyunkwan University

Table of Contents

I. INTRODUCTION

II. JAPANIFICATION

A. Background: Japanese Economic Stagnation from 1991

B. Concept of Japanification

C. Signs of Japanification in South Korea

III. EMERGING FUNDAMENTAL THREATS FOR SOUTH KOREAN ECONOMY

A. Productivity Imbalance

B. Demographical Transition and Discouragement

C. National Debt Surge

IV. SOUTH KOREA’S EFFORTS

A. Economic Innovation and Red-tape Reduction

B. Consumption Stimulation

C. Undermining Discouragement: Labor and Welfare Policies

V. CONCLUSION

REFERENCES

Keywords

Japanification, South Korean economy, The Lost Decades, Deindustrialization, Demographic

Cliff, National debt, Welfare policy

Discussion Points

1. Is South Korean economy “following” down the path of Japan’s Lost Decades or is it

just undergoing a common recession? Is South Korean government’s optimistic

diagnosis convincing?

2. What can be other factors that led to South Korea’s current economic recession? You

may focus on South Korean economy itself or refer to Japan’s experience of the Lost

Decades and/or other countries’ economic recessions.

3. Led by Prime Minister Abe Shinzo, Japanese economy currently tries to break away

from the long-lasting economic stagnation. In what respect do you think Abenomics

has been successful, failed or unsure yet to recover the economy? What should South

Korea learn from Abenomics?

– 1 –

I. INTRODUCTION

Comparing its economy with that of Japan has never been more common in South Korea.

Most of those comparisons try to show that South Korea is following down Japan’s path from

late 1980s, which has been notoriously known as “the Lost Decades”. This is actually not a

problem only for South Korea. Mainly characterized by disability of economic policies,

oversupply of products and economic agents’ fear of the future, this “Japanification” is even

believed to be one of the most sensational transitions of human society that has been never

experienced. Japan has been diagnosed to be the first, yet not the only. What makes it serious

especially in South Korea, however, is that South Korea is expected to confront

“Japanification” in incomparably sooner future.

South Korea is believed to be the fastest country after the World War II to achieve both

economic growth and political maturation (democracy). The development was so dramatic

that this has been called “Miracle of Han River”. The “Miracle”, however, turned out to be a

two-edged sword. Conglomerates and the government succeeded to bring a quick economic

flourish. However, companies focused on making short-run profits with less investment.

People with higher quality of life did not prefer to raise children because of misled welfare

system. Oversupply of houses and economic uncertainty caused real estate mismatches.

Blinded by the legacy of the “Miracle,” politicians ignored and were ignorant about these

ongoing crucial, fundamental problems.

Throughout the human history, more supply has been backed up by more consumption

from more population. This grand maxim of economics is being challenged by a brand-new

phenomenon of “Japanification”. Population starts to diminish and less people are able to

consume and work. Japan was the first, and South Korea is following that path extremely fast.

A brand-new solution is needed to target this brand-new phenomenon. This study tries to

point out (i) what the economic term “Japanification” means, (ii) what the emerging

fundamental threats against South Korean economy that may lead to “Japanification” are, and

(iii) how South Korea tries to evade those threats.

– 2 –

II. JAPANIFICATION

A. Background: Japanese Economic Stagnation from 1991

Japan was one of the countries to show the most prominent economic growth after World

War II. Growth rates of Japan’s economy were exceptionally high: an annual average of 10%

in 1960s, 5% in 1970s and 4% in 1980s. The nominal GDP was $91 million in 1965 and

soared rapidly to $1.065 trillion by 1980. Mainly led by the Ministry of International Trade

and Industry (MITI), Japan liberalized its trade after gaining the fruit of trade protectionism

and made huge trade surplus every year. The trade surplus against the United States was

especially remarkable, exceeding $5 billion in 1976 and reaching $12.1 billion in 1978

(Scuka, 1996). Scholars including Ezra Vogel, well known for his bestseller Japan as Number

One (1979), also made very optimistic prediction of Japan’s economy (Shin, 2014: 15-16).

Japan’s economic success continued even though the value of the yen had been greatly

appreciated by Plaza Accord of 1985. The exchange rate of the dollar to the yen dropped fast

by 51% from 1985 to 1987. To prevent recession from the appreciation of the yen, Japan

raised government spending by a great amount and implemented expansionary monetary

policy. Notable was the significant decline in interest rates. Bank of Japan started to lower the

short-term official interest rate 5.00% to 4.50% in January 30, 1986. The interest rate reached

2.50% in February 23, 1987 after consistent drop of 1986 and was kept unchanged by May 31,

1989. Lower interest rate led households to have riskier assets other than currency or demand

deposits, such as real estates and stocks. Demand for the riskier assets rising, the asset effect

led households to consume more. Moreover, banks, supported by the government and new

laws, offered more loans to firms and investors with less regulations. Skyrocketing

consumption and investment brought about a huge flourish to Japan’s economy than ever.

However, the estimated bright future turned out to be enormous bubble. Firms and

investors moved their focus to foreign assets. Bank of Japan failed to contract the money

supply on the right time. Even though Bank of Japan started to reduce money supply by

raising the official interest rate up to 6.00%, Japan could not save itself from the burst of the

bubble. The Nikkei 225 plummeted from 38,915 in December 1989 to 14,309 in August 1992.

Average land prices in six major cities (Tokyo metropolis, Yokohama, Nagoya, Kyoto, Osaka

and Kobe) fell by 38.7% in three years from the peak of 1990. Households’ income and

– 3 –

consumption dropped gravely, as a result of the asset and stock price collapse (negative asset

effect). Lower consumption led to lower profit of firms. A vicious cycle settled down in

Japanese economy.

Japan could not make a swift recovery from the economic recession. Rather, the

recession showed a new and unique pattern of stagnation where traditional economic policies

became ineffective. The debt ratio to GDP rose sharply from 71% (1991) to 229% (2011)

because of the government spending and the money supply increase. However, the GDP

growth rate from 1991 to 2011 stayed at 0.76% in average. Japan had held 18.09% share of

the world economy in 1994, yet the figure fell to 8.40% in 2012. Moreover, in 2010 China

surpassed Japan to become the new second-largest economy of the world. This recession in

Japanese economy ongoing from early 1990s has been uniquely known as “the Lost Decades.”

B. Concept of Japanification

The term of “Japanification” originally meant Japanese culture spread of 1950s in the

Western society. After the Great Recession of 2008, however, Japanification started to refer to

a brand-new tendency of economic recession that Japan had shown after the great bubble

burst. During Japanification, an economy experiences: small consumption even in low

inflation; small investment even in low interest rates; upsurging national debt; rapid

demographical transition; and people with helplessness and discouragement [Table 1]. It has

been pointed out that this peculiar type of recession is occurring in other developed

economies such as the United States and the European Union (Hong, 2014: 40-62).

Table 1. Characteristics of Japanification

– 4 –

What makes Japanification different from other economic crises such as the Great

Depression of 1929 is that the economy in Japanification is paralyzed by fear and worry so

that economic policies cannot work properly. Expansionary economic policies, one of them

New Deal, had led to more consumption, more investment and less unemployment. During

the Lost Decades of Japan, on the other hand, fiscal and monetary policies failed to stimulate

consumption and investment, as consumers and firms worried about the future and increased

saving, not spending. Furthermore, plummeting birth rate shrank the labor force and

exacerbated the recession. Traditional economic theories on the growth based on more labor

force and more production are facing a serious challenge of Japanification.

C. Signs of Japanification in South Korea

Japan’s nearest neighboring country, South Korea is one of the most worrying countries

about its following down the path of Japanification. Mass media, institute reports and

policymakers after the Great Recession have tried to analyze Japan’s Lost Decades to prevent

South Korean economy from falling into such a deflation trap. Indeed, South Korean

economy in 2010s shows a different type of stagnation, although it has made a quick recovery

and kept a stable growth right after getting out from the trough of the Great Recession. The

economy, however, has some fundamental threats that can harm its stability in a near future.

Statistics support people’s worrying. Economic Surveys in Korea 2016 by Organization

for Economic Cooperation and Development (OECD) shows that the real GDP growth has

slowed down and real industrial production has failed to grow [Figure 1]. The rate of

consumption to disposable income has been stalled at around 60% for more than ten years,

meaning that Koreans have started to spend a smaller portion of their income [Figure 2]. GDP

growth is becoming attributable less to consumption growth but more to net export rise

[Figure 3]. Consumption and investment had held up the GDP during the period of financial

crisis in late 1990s, while in 2015 consumption share in per capita GDP is below 50%.

Considering that net export is vulnerable to exogenous variables, the growth relying on net

export cannot be said to be stable.

– 5 –

Figure 1. Key Macroeconomic Indicators of South Korea1

Figure 2. Rate of Consumption to Disposable Income

1 OECD, 2016: 15.

– 6 –

Figure 3. Per Capita GDP Composition

To make matters worse, “population aging in Korea is projected to be the fastest in the

OECD” (OECD, 2016: 18) [Figure 4]. The rate of the population over the age 65 is 13.1% in

2015, while this figure is predicted to rise remarkably to 24.3% in 2030, 32.3 in 2040 and

40.1 in 2060 (Kim, Myeong-eun, 2016). Also Koreans show their discouragement in well-

being indicators such as income, jobs and earnings, housing, work-life balance, health status

and social connections [Figure 5]. South Korean government currently does not officially

recognize that its economy is going down the path of Japanification. Economic indicators,

however, are showing convincing signs of Japanification in South Korean economy.

– 7 –

Figure 4. Percentage of Population Aged 65 and Over in Respect to the Labor Force

in 2014 and 2050 (predicted)2

Figure 5. OECD Survey of Well-being Indicators3

2 OECD, 2016: 18.

3 OECD, 2016: 17.

– 8 –

III. EMERGING FUNDAMENTAL THREATS FOR SOUTH KOREAN

ECONOMY

A. Productivity Imbalance

Ulsan and Geoje are the centers for South Korea’s shipbuilding industry, which has kept

the world’s No. 1 position. More than 65,000 employees work for the industry at Ulsan and

85,000 in Geoje. Shipbuilding corporations including Hyundai Heavy Industries Co., Ltd.

(HHI) and Hyundai Mipo Dockyard (HMD) pay significant amount of regional tax. HHI paid

the regional tax exceeding 40 billion won for Dong-gu (district), Ulsan each year for 2014

and 2015, taking charge of approximately 30% of the whole tax levied by the district (Park, et

al., 2016).

Regional economies that has developed thanks to the growth of the shipbuilding industry

is now falling because of the downslide of the industry. HHI had paid the regional income tax

by Ulsan Metropolitan City of 52.5 billion won in 2013, yet the amount was halved to 25.5

billion in 2014 and further decreased to 21.7 billion in 2015, following the deficit that the

corporation had experienced. As workers earn less money and job security is severely

damaged, small restaurants in Ulsan are being forced to endure 30 to 50% decreases in their

revenue (Park, et al., 2016). Real estate prices are falling and the population is decreasing. It

is expected that the regional economy will take more severe shock when the shipbuilding

corporations start to layout their employees. What makes the problem even more serious is

that such an impact is also expected to spread to a great number of small outsourced

businesses affiliated to the large shipbuilding corporations.

South Korea is well-known for its government-led industrialization from 1970s. Heavy

industries such as steel, chemical production and shipbuilding did sustain the economy for

more than 30 years. Promoting the exports from those industries has been a great priority in

South Korea’s economic policies. Such manufacturing industries, however, are highly capital-

and-technology intensive, not labor-intensive (Shin, 2014: 87). That is, developing

technology lessens the need to hire more workers, so that a paradox in which the industries

grow but the employment shrinks appears. The industries are also vulnerable to variables

from out of the country, because their revenues are mainly based on exports.

– 9 –

South Korea’s manufacturing and export-oriented economic policies have aimed for a

“trickle-down effect,” meaning that policies in favor of larger manufacturing businesses

would lead to a flourish in the economy as a whole, including small businesses and

employees. However, it has become remarkable recently in South Korean economy that

service sector is expanding very fast, but with low productivity. While the share of

employment from services weighs about 70% in the economy, the productivity of services is

below the half of that of manufacturing [Figure 6]. The number and the share of service

workers are increasing significantly while the average wage for a worker in service sector

compared to those in manufacturing keeps low level (55% in 2010). OECD (2016: 29) points

out, “Korea’s export-led development has siphoned capital, talent and other resources away

from services and toward manufacturing.”

Outsourcing and moving production overseas of Korea’s manufacturing industry led to a

great unemployment in the sector from 1990s. The unemployed workers moved to the service

sector with low barriers to entry and less expertise. The financial crisis of 1997 worsened the

problem. The labor movement from manufacturing, with high productivity, to the service

sector, with low productivity, is a unique characteristic of South Korean economy, while

overall productivity has increased by the deindustrialization (industrial shift from

manufacturing to service) in most of the developed countries (Shin, 2014: 100). As of 2016,

90% of the workers and profit in the service sector are from small or middle-sized enterprises

(SMEs).

The great aim of “trickle-down effect” in South Korean economic policies is therefore

facing a great challenge. Large manufacturing firms cut their investment and hire less

workers. Consumers’ income falls. Less consumption leads to a lower profit of the firms.

Firms reduce investment and employment further. Real wage keeps a standstill, 100 in 2007

to 100.6 in 2012, even though labor productivity increased to 109.2%. The share of

household income in GDP declined from 69% in 2000 to 62% in 2012, while that of business

income rose 17% to 23%, a third-fastest speed in 24 OECD countries. Firms keep their

revenues in savings, not spending for wages and dividends. A new economic trend of

“wageless growth” is approaching (Shin, 2014: 108).

– 10 –

[Figure 6] Service Sector Productivity of South Korea Compared to OECD Average4

This vicious cycle is actually a pattern that Japanese economy has shown in the 1990s

after the bubble burst. And the cycle has started to come true from the manufacturing sector

including shipbuilding industry, on which the South Korean government have relied for a

long time for economic growth.

B. Demographic Transition and Discouragement

Aging is one of the problems that many countries have in common nowadays. South

Korea is undoubtedly the fastest aging society among them, even faster than Japan, which is

currently the most aged country. With a great number of elderly citizens born right after the

Korean War (1950 – 53) and extremely low birth rate from 2000s, South Korea’s median age

is already over 40 (record of 2014). The figure is expected to rise 52.8 in 2040. By 2060, 40.1%

of the entire population is estimated to be over the age of 65. As a result, the labor force

(population from the ages 15 to 64) is expected to be shrinking greatly to 21,865,000 by 2060.

Comparing the figure of 36,953,000 in 2015, the rate of decrease is going to be

approximately 59.2% (Kim, Myeong-eun, 2016). Moreover, South Korea is expected to set a

4 OECD, 2016: 30.

– 11 –

record of 26 years (2000 – 26) for the number of years moving from an “aging society (a

society with the rate of population over the age 65 of 7%)” to an “aged society (a society with

the rate of 14%). The figure was 35 years for Japan (1970 – 2005) (Shin, 2014: 50-51). This

“demographic cliff” (Dent, 2014/2015) may convey severe economic danger, as the labor

force diminishes to produce less, consume less, and pay less tax for seniors.

It is very important to find out the reasons why couples worry about having a child. First,

maternity/paternity leaves are not well being enforced in workplaces. Pregnant employees in

South Korea are provided rights to take maternity leaves by laws, to have no work overtime

and to request smaller workload. Firms, however, are reluctant to ensure those rights of

pregnant workers and rather put pressure to quit their jobs. One of the recent cases was

Kumbokju case of March 2016, where a female employee is forced to work without a

computer and to be secluded from her fellow employees after she reported her marriage to the

liquor company. The dismissed worker had been said to quit her job because in Kumbokju “it

is a custom for female employees to quit their jobs after their marriage” (Jin, 2016).

According to the July 10, 2016 report by Ministry of Employment and Labor, 223 cases of

violation over maternity right laws from 978 businesses were reported in 2015 (Kim, Gyu-tae,

2016). The danger of discrimination in workplaces and/or losing the job endangers the will to

have a child.

Second, there is shortage of affordable childcare services with high quality. South Korea

has put a great emphasis on strengthening the public childcare and the pre-primary education

from late 2000s. Despite this, the government expenditure on the pre-primary education per

child is still 30% below the OECD average (OECD, 2016: 141). Also, the share of mothers

with children from ages 0 to 2 who were employed in 2013 shows a great gap from the

OECD average, even though Korea exceeded the OECD average for share of children

registered in childcare on that year [Figure 7]. In addition, parents experience shortage of

public childcare services, putting their names on the waiting lists and looking for private ones,

where the costs are generally greater. Parents also fear about low quality of childcare services

and teachers’ violence on the children.

– 12 –

[Figure 7] Public Childcare Has Not Been So Successful to Raise Womens’ Employment5

Third, working hours are longest among OECD member countries: for men to be the

second-longest and for women to be the longest. Work-life balance is becoming a new topic

for South Korea, yet “the tradition of long working hours” continues as of today. Firms prefer

to let workers work overtime and to hire more non-regular or part-time workers, because

“employment protection makes it difficult to dismiss [workers]” (OECD, 2016: 144). Despite

the long working hours, labor productivity per working hour is only 55% of the upper half of

the OECD (OECD, 2016: 48). It is being more difficult for workers to expect to earn enough

money to raise a child, as approximately 100 to 200 million won is estimated to cost to raise

one child until college years.

Unemployment and low job security are prominent especially for the youth and the

seniors. Job security has become the most important factor for the youth to choose jobs. As

more than 70% of young people receive college education, they expect themselves to be

appointed to a regular job and avoid SMEs with low job security and wage. Many of the

young people lose their will to secure a job in private sectors because the vacancies in large

companies are limited. They study to secure the job of public officers, as a better substitute

with higher job security. Seniors are also concentrated to non-regular, low-paying jobs. 67.4%

of the workers aged over 60 were employed non-regular in August 2015 [Table 2]. As a result,

5 OECD, 2016: 142.

– 13 –

the relative poverty rate for people over the age 65 is four times higher than the OECD

average.

In sum, the great demographic transition makes South Koreans, especially youth, seniors

and women, feel discouragement and helplessness. The reasons include low job security,

shortage of affordable and high-quality childcare services, low income level, job mismatches

and losing hope to improve their quality of life. It has been becoming popular for some of

South Korean people to call their country “Hell Joseon,” sarcastically implying that the

current social condition is comparable to “hell” and nothing better than way back in the 19th

century (Joseon was the former name of Korea).

Table 2. Incidence of Non-Regular Employment in Each Category in August 20156

C. National Debt Surge

South Korea’s national debt is increasing sharply, regardless of the agents. The ratios of

the debt by each agent with respect to the GDP are also rising greatly. In between 2004 and

2015, the ratio for government debt soared from 14.8% to 41.5%. The ratio also rose for

corporate and household debts, from 79.1% to 106.0% and from 62.6% to 87.2% respectively.

The increase from 2012 to 2015 is particularly remarkable, the ratio for government debt

rising by 11.6% points and that for household debt by 6.4% points [Figure 8].

6 OECD, 2016: 127.

– 14 –

Especially serious among them is household debt. The amount was 542.9 trillion won in

2005 and surpassed 1 quadrillion won in 2013 for the first time. The annual growth rate

marks over 5% every year, indicating that the debt growth is exceptionally fast [Figure 9].

The amount of the household debt as of the third quarter of 2015 reaches 1.1660 quadrillion

won. Bank of Korea diagnoses that 1.342 million households (12.5% of the total number of

households who have monetary debt) are “marginal,” of which net monetary asset is negative

and the debt service ratio exceeds 40%. If the interest rate rises by 100 basis points (or 1%

point), the number of marginal households is expected to rise by 90 thousand. Also serious is

that the speed of household debt rise is over that of household income increase. Monetary

Stability Report on June 2016 by Bank of Korea points out that the household debt on the

first quarter of 2016 increased by 11.4% compared to the first quarter of the previous year,

yet the income increased only by 4.1% (Yu, 2016).

Figure 8. Domestic Debt by Agents with Respect to GDP

(Source: Bank for International Settlements)7

7 Im, 2016.

– 15 –

Figure 9. Household Debt

The rapid increase of household debt is a fairly recent phenomenon. The household debt

to GDP ratio was only 1.2% in 1962, yet the figure surpassed 50% and 60% in 2000 and 2002

respectively. The recent trend of extremely low interest rates motivates people to have real

estate, with low liquidity, instead of monetary assets. It becomes more and more difficult to

rent a house because the rent (jeonse in Korean) rises very fast because lenders prefer to take

more rent in the current trend of low interest rates. The rent for housing reaches record highs

of 70 to 80 percent of the actual price of the houses in a number of metropolitan areas.

Current economic stagnation induces Bank of Korea to lower the interest rates further,

implying that the trend of low interest rates and high housing rents might last longer. Bank of

Korea’s base rate is already a record low of 1.25% (June 2016).

Government debt is another threat. The government deficit of 2015 recorded 38 trillion

won, the largest after the Great Recession of 2008 – 9. National monetary debt rose by 57.3

trillion won in a single year of 2015, the total amount recording 590.5 trillion won (556.5

– 16 –

trillion won for central government and 34 trillion for local governments). Government debt

per capita is 11.66 million won. The national debt including the pensions for public officers is

rapidly increasing by 66% in 4 years (2011 – 15). As the numbers of public officers and

senior citizens are expected to rise further in the future, the expenditures on pensions and

welfare are expected to rise steeply. Such expenditures have low flexibility because it is set

by the laws and out of the government’s discretion.

Corporate debt increase is remarkable in heavy industrial firms. Declining world demand

is reducing the firms’ profit and raising debt. The debt ratio skyrocketed from 286% to 4265%

for Daewoo Shipbuilding & Marine Engineering in just two years (2013 – 15). STX rates

1651% and Hyundai Cement Co., Ltd. rates 1531% in 2015. The amount of corporate loans

was 959 trillion won in the first quarter of 2016, increased by 6.6% compared to the first

quarter of the previous year. The number of corporates with interest coverage ratio lower than

100% for three consecutive years was 1581 (8.2%) in 2009 but 2561 (10.6%) in 2014. The

instability of such marginal firms discourages investment and consumption not only for the

firms but also for the whole economy.

– 17 –

IV. SOUTH KOREA’S EFFORTS

A. Economic Innovation and Red-tape Reduction

South Korean government initiated

“Three-year Plan for Economic Innovation”

in 2014 to target the fundamental threats on

its economy. The Plan indicates seven main

categories for economic improvement: public

sector reform; a disciplined market economy;

securing the social safety net; realizing the

creative economy and increase investment;

facilitating the overseas expansion of

companies; securing favorable investment

conditions; and expanding domestic demand

and increasing youth and female employment

[Table 3]. Some key improvements that has

been implemented for these categories

include: adopting wage peak system in all of

313 public institutions; eliminating

overlapping budget programs; introducing

Basic Pension; supporting start-ups; and

managing household debt. These actions are

expected to contribute to vitalizing the

economy.

Table 3. Key Elements of the Three-year Plan

for Economic Innovation8

8 OECD, 2016: 61.

– 18 –

South Korea is also trying to reduce regulations that has been burdensome to households

and firms. President Park Geun-hye puts her priority to regulatory reform and strengthened

the roles of the Regulatory Reform Committee (RRC). Starting from March 2014, the

President chairs “Regulatory Reform Ministerial Meeting,” where relevant ministers, officials

and experts discuss the way to improve regulations to meet the public opinion and help boost

the economy. The government is greatly focusing on loosening the regulations that has tied

up small firms, which has been described as “the thorn under the nails.” By the end of 2015,

386 of 426 proposals have been resolved. South Korea also tries to modify its principles over

regulations to expand the sunset rule and to move from negative-list system to a positive-list

system (OECD, 2016: 61).

Nevertheless, regulatory reform has a long way to go. The number of regulations

affecting SMEs is still large. In 2013, SMEs were estimated to face a total of 8,921

regulations covering not only economic issues such as entry, price, trading and quality, but

also non-economic issues including environment, consumer safety, industrial accidents and

social discrimination (OECD, 2016: 85). As SMEs takes a large part of the service sector, the

regulations over SMEs are considered to negatively affect the productivity gap between the

manufacturing and the service sectors.

One of recent examples is a “food truck” case (Sim, 2016). South Korean laws provide

that food services should be offered in a fixed place, that the owner has to finish government-

authorized safety instruction program, and that the car used to sell food should be inspected

by the government. Satisfying all the measures provided by the laws, the very first “legal”

food truck was registered in Jecheon, Chungcheongbuk-do in September 2014. The owner of

the truck, however, was not allowed to move from place to place to sell her food, regardless

of the circumstances. On the other hand, “illegal” food trucks could move the places to meet

demand. The food truck owner with legal authorization had to decide to shut down her

business in March 2015, only six months later she received the government’s authorization.

Another point that President Park emphasizes is “Creative Economy.” Reinforcing tax

exemptions on investments and building infrastructure connecting startups to grownup

companies and the government, it is a one-stop idea to support startups with initiatives. 18

Centers for Creative Economy and Innovation (CCEI) have been established as of 2016. Each

– 19 –

center has its own specialized fields linked to a grownup company, such as CJ in Seoul for

culture and city life industries, Hyundai Motors in Gwangju for automobile and hydrogen

fuel cells, and Lotte in Busan for logistics, information technology and film industries [Table

4]. The idea of creative economy, however, is facing criticism that it is too much jaebeol

(large companies) centric; the mechanism can be malfunctioning merely to give easy chances

for large companies to buy innovative ideas from startups.

Area Specialization Affiliated Company

Seoul Culture, City Life CJ

Incheon Smart Logistics Hanjin

Sejong ICT, Smart Agriculture SK

Daejeon Technology SK

Gwangju Automobile, Hydrogen Fuel Cell Hyundai Motors

Busan Logistics, IoT, Film Lotte

Ulsan Shipbuilding, Medical Machinery Hyundai Heavy Industries

Daegu IT, Electronics, Fiber Samsung

Gyeonggi-do IoT, Game, Fintech kt

Gangwon-do Big Data NAVER

Chungcheongbuk-do Biotech, Cosmetics LG

Chungcheongnam-do Solar Energy Hanhwa

Jeollabuk-do Carbon Fiber Hyosung

Jeollanam-do Agriculture, Fishery, Food GS

Gyeongsangbuk-do IT, Smart Factory Samsung

Gyeongsangnam-do Machinery Doosan

Jeju-do Culture, Software, IT, Tourism Kakao

Pohang Energy, Material POSCO

Table 4. Specializations of Centers for Creative Economy and Innovation9

9 CCEI, 2016.

– 20 –

B. Consumption Stimulation

South Korean government eagerly tries to boost consumption. These measures were

markedly concentrated after 2015, as the fear of middle east respiratory syndrome (MERS)

smashed the country’s consumption. First, individual consumption taxes on automobile,

luxury goods and electronic devices with high capacity has been reduced from July 2015.

This measure was originally a six-month plan, yet later in 2015 it was decided to lengthen the

reduction benefit by June 2016. Second, “Korea Grand Sale” and “Korea Black Friday”

events were planned to attract domestic and foreign shoppers. Those two events were

organized by different hosts, “Korea Grand Sale” by private Visit Korea Committee and

“Korea Black Friday” by the government. Third, the government designated two “temporary

holidays,” August 14, 2015 and May 6, 2016, solely for boosting the economy. “Temporary

holidays” had been very rare in South Korea, designated in times with great national

importance such as presidential and general elections or outstanding achievement in

international sports events.

Temporary and superficial, the measures had problems by themselves as well as in

general. For example, “Korea Black Friday” (October 1 to 14, 2015) was planned so abruptly

that it rather confused the shoppers and the manufacturers that had to prepare for meeting the

demand. “Unlike in the U.S. where the Black Friday was started by likeminded merchants to

mark the beginning of the Christmas shopping season, this event was planned and engineered

by the government to boost domestic spending” (Park, 2015). It also collided with the private

sector-hosted event of “Korea Grand Sale” that had been ongoing (August 14 to October 30,

2015). Moreover, individual consumption tax reduction and “temporary holidays” were also

Band-Aids and not long-lasting measures to target the fundamental threats and the current

economic stagnation. In sum, a trend of recovery cannot be achieved without breaking

through the fundamental threats. Such events might have been a “stimulus,” but did not

success to build up a “trend.”

– 21 –

C. Undermining Discouragement: Labor and Welfare Policies

It has been crucial to recover South Korean people’s expectation for the economy in the

future damaged by the recent economic recession. Japan also has suffered from the

discouragement of so-called “satori generation,” who spend their childhood during the age of

bubble burst and lost the dream to make money and to consume (Shin, 2014: 184-185) Labor,

population and welfare policies are closely related to each other as they influence people’s

confidence and willingness to work. The recent progresses in Korea include the following

(OECD, 2016: 68):

South Korean government raised public subsidies for non-regular workers

currently employed and participating in training the government provides from

75 billion won in 2014 to 83 billion in 2015.

Wage peak system is encouraged not only to the public sector but also for the

private sector, and the government provides subsidies and consulting services

about adopting the system.

In July 2015, the government launched Customized Benefit System, in which

eligibility criteria varies according to the livelihood, medical services, housing

and education benefits, to improve the existing Basic Livelihood Security

Program (BLSP).

Public childcare centers and kindergartens with assistant teachers were provided

in 2015 and teacher training was reformed in 2016.

One of the most remarkable progress was the new Tripartite Agreement established by

Economic and Social Development Commission in September 2015. Including the

representatives from workers, employers, the government and public NGOs, the Commission

in February 1998 had contributed to the successful breakaway from 1997 financial crisis by

building a consensus called Tripartite Agreement regarding a variety of issues among workers,

employers and the government. After 17 years the Commission signed to a new Agreement,

assuring to: increase youth employment; alleviate the dual structure of the labor market;

expand the social safety net; and eliminate uncertainties on wage and working hours (OECD,

2016: 123).

– 22 –

However, the Agreement had to face a big challenge that Federation of Korean Trade

Unions, one of the two largest labor unions of the country, renounced the Agreement in

January 2016. The other largest union, Korean Confederation of Trade Unions (KCTU), had

not participated in the negotiation process. The government, on the other hand, pledged to

step forward to legislate the Agreement, including the labor market reform. In spite of the

grand Agreement for the first in 17 years, the government and major labor unions are back to

the state of feud.

In addition, political ineffectiveness prevents policies from being enforced at the right

time in Korea. The 19th National Assembly (2012 – 16) received a large number of criticisms

over its unsuccessful politics. Bills with great national importance were often abandoned to

be discussed, while bills with each party’s interest passed the Assembly without sufficient

discussions. Lawmakers must actively discuss and negotiate disputable social, economic

issues not only with other politicians but also with the general public. Political effectiveness

itself can improve people’s discouragement and helplessness.

– 23 –

V. CONCLUSION

The economic miracles of the past are now fading in South Korea. The country is facing

a new type of recession that can be characterized by fear, worry and discouragement.

Industries that heavily contributed to the past miracle are now in an unprecedented crisis.

Economic policies less favorable to small businesses are generating a great productivity gap

between manufacturing and service sectors. Aging is ongoing fastest in the world and the

labor market is distorted, discouraging current and future labor forces. National debt is

marking a record high every year.

Signs of Japanification is emerging in Korea. We need to prepare for this new economic

trend, keeping a careful eye on the fundamental threats including productivity imbalance,

demographic transition, discouragement and national debt. The government is making

meaningful efforts, yet not enough or misleading. Embracing workers, small businesses and

the poor, the government must design a new masterplan of recovery.

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