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     Nov 30, 2012

The future of wealth and welfare in Korea
By Yong Kwon

With Ahn Cheol-soo bowing out of the presidential race, the next leader of the Republic of Korea will either be conservative Saenuri Party's (New Frontier Party's) Park Geun-hye or liberal Democratic United Party's (DUP's) Moon Jae-in. Unlike Ahn, the remaining two candidates are firmly entrenched members of the political establishment. As seasoned veterans of Korean politics, Moon and Park claim to have the necessary leadership experience to lead the country through the global economic slowdown. Indeed, their political resumes, which include a cabinet position and party chairmanship, are impressive enough.

Unsurprisingly, both candidates characterize the other as being unprepared for the task of handling issues of national concern such as the rising cost of healthcare, burdensome tuition fees, and fluctuations in property prices. Responding to the key


concerns of the public, each candidate has presented a fairly conventional policy in line with his or her party's traditional stance. However, the fundamental problem underlying the people's cost of living remains largely untouched.

Neither candidate appears to acknowledge that until the national economy reverses its industrial structure, individuals will have to contend with increasing burdens on their cost of living and social welfare. Since no policies contributing to the solution of Korea's current jobless growth have been presented, one must ask if either candidate is truly ready for economic leadership.

Recognizing the rising share of healthcare in relation to GDP, the most pronounced difference between the two candidates are their approach to reforming the healthcare institution. Park contends that priorities must be given to the elderly and that the state will target key health concerns including cancer and heart disease. Meanwhile, Moon is promoting universal healthcare, vastly expanding government spending in this area.

The principle philosophy behind this debate closely resembles the two party's conflict over free school lunches in the Seoul mayoral election last year when independent candidate Park Won-soon, who criticized the ruling conservative party's reduction of funds for underprivileged children, won with strong support from the DUP.

However, many experts who examined the two parties' stances on healthcare note that DUP's plans, which will cost three times more than what Park is proposing, are unrealistic while Saenuri Party's policies fail to elaborate on long-term funding and only address short-term issues.

Less debated but nonetheless a serious concern for the people is the state of South Korea's housing market. Devaluation of homes and rising rent cost are forcing people into serious debt and pushing people out of Seoul. (See Korea feels housing shock, from July 4, 2012 ) The ruling Saenuri Party points to the policies of the liberal Roh Moo-hyun administration (2003-2008), which drove up property prices and induced people to take on debt to secure homes, as the key catalysts of the current problem. However, liberal legislators argue the opposite, noting that cutting regulations and property taxes during the current conservative Lee Myung-bak administration have not reversed this trend.

What both parties ignore is how all these issues are intrinsically connected to the shift in the industrial structure of the economy at large. This may be because the national economy appears healthy - South Korea currently ranks eighth in the world in volume of trade, recently surpassing Italy. Furthermore, Korea's relatively strong performance during the financial crisis gave the impression that the economy stood on firm ground.

However, these indicators failed to fully express the real condition of the market. The Bank of Korea estimated in 2011 that 52% of the GDP was derived from exports, making South Korea the most export-dependent economy in the G20. To meet the demands of the increasing export-industry, share of manufacturing in the total supply of goods increased while services declined. Compared to service industries, manufacturing requires less hires to increase output.

Reflecting this shift in the structure of industry, the employment inducement coefficient (measured by jobs created per billion wons) dropped from 15.8 in 2005 to 12.3 in 2010. [1] Decrease in employment directly corresponded with diminishing average income growth which was estimated at only 0.19% from 2010 to first quarter of 2011. In the same time period, domestic price of goods rose by 4.5%. [2]

One might see this as a temporary difficulty induced by volatility in the cost of raw materials such as oil and the overall difficulties facing the global economy, but the employment inducement coefficient has been diminishing long before the financial crisis hit the global market.

This jobless growth, and in turn decreased tax revenue from unemployment, directly impacts the welfare policies of both the Saenuri Party and the DUP. The current Lee Myung-bak administration has focused on making South Korea the hub of international trade, creating a web of free trade agreements (FTA). The idea is straightforward: induce economic growth and in turn jobs by reducing barriers to trade.

However, as Paul Krugman points out from his brief commentary on the Korea-US FTA from the US point of view, free trade not only increases exports but also imports, yielding the same GDP. In addition, "if the jobs [US] gain[s] are higher value-added per worker, while those [US] lose[s] are lower value-added, and spending stays the same, that means the same GDP but fewer jobs." [3] The same macro-economic principles apply to South Korea when discussing the relations between manufacturing and service sector jobs. The current policy of decreasing barriers to Korean export will not eliminate areas of domestic concern. The new administration must pursue a different policy.

Coming back to the election, it is easier for DUP's Moon Jae-in to attack Saenuri Party's Park Geun-hye at a time when social welfare appears on the line because of her familial ties to the country's authoritarian past. Many liberal supporters of Moon's policies see Park's support for conglomerate-driven investment and job creation as a legacy of president Park Chung-hee's inequality-driven economic growth enforced by political repression. However, long time observers of the Korean government have commented that change has been stymied as much by the liberal parties' lack of will as opposition from conservative legislators.

Both sides have frequently utilized the term "economic democratization," but little has been done to bring their ideals to practice. Meanwhile, the increasing burden of social welfare has begun to race against the people's income and the nation's economic growth. Maintaining the status quo is not an option for the next government and whoever wins the popular mandate on December 19 will take on the difficult task of working within a constrained global environment and restrictive domestic factors to ensure both enhanced growth and quality of life for the population at large. Yet with less than a month left until the final vote, neither candidate appears to display economic leadership worthy of much confidence.

1.Park Soon-bin."More growth, fewer jobs," Hankyoreh, May 31, 2012.
2. US restrictions on oil imports from Iran probably contributed to this trend. See "US faces sanctions dilemma in East Asia," July 21, 2012.
3. Paul Krugman, "Trade Does Not Equal Jobs," NY Times, December 6, 2010.

Yong Kwon is a Washington-based analyst of international affairs.

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