President Moon Jae-in of South Korea has achieved diplomatic success that his predecessors could only dream of. Détente has come to the Korean Peninsula. Although a permanent peace still may lie only in the distant future, a sustained reduction in tensions and risks of renewed hostilities appears possible.
However, Moon is finding the economy to be a greater challenge than his North Korean counterpart. Moon was elected two years ago. He won despite his notably dovish views on North Korea. He appealed to Koreans who believed that the gains from the Korean miracle had not been shared widely enough.
Moreover, he benefited from the embarrassing collapse of his predecessor’s conservative administration amid bizarre corruption allegations.
A man of the left, Moon tried the standard panaceas: tax hikes, higher welfare payments, greater restrictions on work and minimum wage increases. Unfortunately, these policies have not worked. According to The New York Times (NYT): “Growth has slowed, unemployment has risen and small-business owners … are complaining.”
The poor results should come as no surprise. Government micro-management rarely solves structural economic problems. And even the best-intentioned interventions — Moon officials point to increasing income disparities and quality of life deterioration — often have negative unintended consequences.
Greater outlays and taxes channel resources away from investment and development. Higher taxes reduce incentives for work and investment. Political wage hikes essentially tell companies not to hire lower-skilled, lesser-educated workers, who then find it more difficult to gain experience which would improve their skills.
The latter effect has been evident in the Republic of Korea (ROK). Explained the NYT, a 2017 poll found that 42 percent of small businesses “said they would be forced to shed employees because of the minimum wage increase.”
Europe has suffered from similar policies. Nations as disparate as France and Greece have discouraged hiring by penalizing firing. If the government makes any new employee essentially permanent, companies cannot afford to make a mistake.
The more regulations imposed on a labor market, the fewer jobs it will produce. In Germany it was the Social Democratic government, not Angela Merkel’s nominal conservative administration, which freed up that nation’s economy, sparking that nation’s long boom.
Out of desperation, Moon’s government has offered subsidies to smaller firms. Companies complain that the process is too complex and costly — no surprise. Worse, this approach reinforces a system long biased toward business — that of the larger conglomerates.
It's far better to leave companies alone to both enjoy profits and accept losses, increasing their incentive to do right. Support for workers is best delivered directly, not through corporate intermediaries, which often end up as the real beneficiaries.
Unfortunately for Moon, his interventionist program raised people’s hopes, creating even greater disappointment when it flopped. A top union official spoke of the movement’s “high expectations for this government,” but now he feared the “possibility that the government is backing out or even reversing on the intention of their policies.”
Moon’s approval rating has fallen below 50 percent, and half of his dissatisfied countrymen cite his poor economic performance.
Alas, the situation is not likely to improve soon. The wage minimum is set to increase yet again this year. America’s trade war and China’s slowing economy have made Moon’s job even tougher. Heavily dependent on international commerce, the ROK has been suffering from global economic trends.
Moon is desperate to jump-start the economy. In a New Year’s address, he defended what he termed a “people-centered economy policy.” But he simultaneously emphasized innovation as necessary to “make it possible to transform the fast-follower model economy into a pace-setting economy and to create an economy that leads new markets by generating added value.”
How to do so, however? Generally, the kind of policies Moon has been advocating do not yield transformative economic growth. Politicians simply can’t order technological innovation to occur.
Moon’s travails also could undermine peace prospects on the Korean Peninsula. At the moment, negotiations between the U.S. and North Korea over denuclearization have stalled; President Donald Trump appears to have unrealistic expectations about the likelihood and speed of a North Korean turnover of its nukes.
Only inter-Korean cooperation is going well. However, if Moon's administration ends in economic failure, he is likely to be succeeded by a more hawkish, less welcoming conservative administration. A return to the confrontational "Bad Old Days" would be possible.
That obviously would damage the economy. Increasing risk and fear discourage investment. Moreover, renewed inter-Korean confrontation would put upward pressure on military outlays. But economic consequences would pale in comparison to the costs of any conflict. For the ROK, the outbreak of peace would be the most important transformation of the peninsula that could occur.
A wealthier South Korea also would be better for its neighbors and the U.S. Moreover, an economically successful Moon is more likely to achieve reconciliation with Kim Jong Un, who, in contrast to his father and grandfather, just might desire the same.
That would also be to America's great benefit, especially given Washington's role in guaranteeing the ROK's security. Americans should wish Moon well as he seeks to fix his nation's economy.