Income-Led Growth and Innovative Growth Policies in Korea: Challenges, Rebalancing, and a New Business Ecosystem (Academic Paper Series, Korea Economic Institute of America, May 24, 2018.)
By Choong Yong Ahn
The Moon Jae-in administration in South Korea has taken a two-pronged approach to ensure urgently needed job creation and inclusive growth. Although measures towards each set of economic policies have been implemented since Moon took office in May 2017, what’s often referred to as “incomeled growth” has been prioritized over innovative growth. The income-led growth model is largely driven by domestic consumption through pro-labor distributional policies including a wage hike to raise the disposable income of low- and middle income individuals, thereby triggering equity with growth.
Focused more on the supply side, the innovative growth model encourages startups to create jobs and innovate. It is a great challenge for Korea to pursue growth and equity through both sets of policies. After a year in office, the Moon administration’s economic agenda, often referred to as J-nomics, has not fully produced the intended policy objectives in terms of job creation and growth. To mitigate a declining potential growth rate and pursue robust and inclusive growth, the twin policies need to be rebalanced, reprioritized, and interconnected in a mutually reinforcing manner to empower the private sector to play a bigger role. As a mid-sized open economy, Korea requires global market competitiveness on the supply side to create decent jobs by buoying entrepreneurship and innovation. Structural reforms in the labor market combined with deregulations necessary for the advent of disruptive 4th-industrial-revolution technologies must be expedited. Furthermore, a new business ecosystem in which win-win collaborations between globally-oriented conglomerates and small businesses must be encouraged to replace a zero-sum business culture.
Key Words: South Korea, Moon administration, income inequality,structural reform, business ecosystem
The Republic of Korea’s (hereafter Korea) economy is at a critical crossroads. Like many countries since the 2008 global economic crisis (GEC), Korea continues to exhibit its own “new normal” economic symptoms. Slower growth, rising youth unemployment, and worsening income inequality have been accompanied by a rapidly falling potential growth rate. Against this backdrop, the Moon Jae-in administration, inaugurated in May 2017, has initiated unique economic policies, commonly referred to as J-nomics. The goal of these policies is to shift the Korean economy from a development model that has long revolved around large companies and an export-oriented strategy to a new paradigm that can generate more equitable growth and jobs.
There are two main pillars of J-nomics. The first and flagship policy, instrumental to Moon’s election, is what is often referred to as “income-led growth” through wage hikes and increased social expenditures for low- and middle-income individuals to mitigate worsening income polarization. Boosting household income is intended to trigger domestic consumption and lead to more investment, production, and finally jobs. The second pillar, which entered the picture about six months after Moon took office, focuses on innovative growth to spur startups and small and medium-sized enterprises (SMEs) by initiating or strengthening government support measures in preparation for a 4th industrial revolution. In line with these two pillars, the Moon government also stressed “fair economic surroundings” toward a level playing field between big and small businesses.
However, early signs of J-nomics outcomes raise some challenging questions. Chiefly, to what extent are the two policies effective and complementary, or perhaps contradictory, in achieving job creation and equitable growth? In some crucial ways, the twin policies appear to be struggling to conform with each other based on early signs of economic performance, especially job creation. However, their combined goals of inclusive and equitable growth while boosting corporate and SME competitiveness rightly identifies the main challenges for the Korean economy. This paper attempts to shed light on the successes and shortcomings of these two-pronged economic policies and argues for a rebalancing of priorities. It also suggests how a virtuous business ecosystem, one that goes beyond fiscal and monetary tools, can lead to the mutual growth of big and small businesses, as partly practiced by the Korea Commission for Corporate Partnership
The first section introduces Korea’s economic performance after the GEC, with special reference to income polarization, prolonged unemployment, and, more importantly, declining potential growth rates. The next sections outline the key policy instruments of the income-led and innovative growth policies and their early outcomes. How these policies need to be rebalanced based on these outcomes is then discussed. Before concluding, the paper emphasizes how a new business ecosystem centered around a fair and collaborative framework between corporations and SMEs can further inclusive growth.