Moon's economic gamble

By John Burton

With the euphoria surrounding President Moon Jae-in's detente with North Korea and his resulting sky-high approval ratings, it is sometimes difficult to remember that he was elected a year ago primarily on his promises to fix the economy. On that score, Moon has failed to deliver much.

In a lot of ways, Moon cannot be blamed for this situation. One big reason is that he lacks a parliamentary majority, with the ruling Democratic Party of Korea holding only 40 percent of the National Assembly seats. In addition, his parliamentary political ally, the centrist People's Party, recently dissolved into two rival factions. That makes it even more difficult for Moon to push through his economic agenda when the passage of bills is already slow due to conservative opposition.

Moon is also facing setbacks in reforming the chaebol, with the resignations of two successive heads of the Financial Supervisory Service due to scandals. The government's biggest recent success has been to end the opaque circular-shareholding structure of the chaebol, an initiative that was begun under the previous administration of Park Geun-hye, although he has also managed to push through a corporate tax hike that has disproportionately hit the chaebol.

Other attempts to reform the chaebol have stalled. Pro-business conservative lawmakers have blocked legislation to improve shareholder rights, separate chaebol industrial and financial businesses, and increase penalties for white-collar crimes.

Meanwhile, public anger against the chaebol is rising as underscored by the public protests against Korean Air and its parent company Hanjin Group, including demands that its chairman should resign, over the abusive behavior of its family owners against the airline's employees. This follows Samsung head Lee Jae-yong being released from prison, on bribery charges which stirred public outrage since it was seen as continued lenient treatment of chaebol bosses.

Policies by the Moon administration to narrow growing income inequality appear to have backfired. The decision to raise the minimum wage has been blamed by economists for causing an increase in unemployment as small businesses struggle to meet rising wage costs. The unemployment rate increased to 4.5 percent in March, with youth unemployment at 11.6 percent. That has proved embarrassing for an administration that put job creation at the top of its economic agenda.

These setbacks are taking place against the backdrop of a deteriorating economic performance. Although economic growth is likely to remain stable this year with a growth rate of 3 percent, this is partly due to increased government spending. The government is focusing spending plans on "promoting fairness" by creating 9,500 public sector jobs this year, improving welfare programs and retraining auto and shipyard workers.

But a slowdown in manufacturing activity due to weaker global electronics demand, high youth unemployment, large household debt levels and rising interest rates will place a cap on growth.

The economy is also facing headwinds overseas due to a possible looming global trade war instituted by the U.S. Korea has already been forced to accept changes in the Korean-U.S. free trade agreement.

In reducing youth unemployment, the government has said it wants to promote startups, increase work-study programs and strengthen training. But it may also be forced to take some unpopular steps such reforming the rigid labor market by making it easier to hire and fire workers and overhauling a wage system based on seniority if it is to achieve its goal of creating 220,000 more jobs by 2021.

The government's plan to raise taxes to promote fairness and encourage income redistribution could also send a negative signal by discouraging business investment.

The deeper challenge is that Moon is under pressure to improve Korea's competitiveness when China is embarking on a grandiose plan to become a global leader in high-tech industries that could put Korean rivals in the shade.

Given these economic challenges, it may not be surprising that Moon has focused on inter-Korean relations. But the success of that effort in return will determine the future of his economic reforms. If Moon succeeds, it will strengthen his hand in pushing through the reforms.

Whether Moon's North Korean gamble pays off will soon be seen. If the summit between U.S President Donald Trump and North Korean leader Kim Jong-un in Singapore on June 12 appears to go well, Moon could become an immediate beneficiary when local elections are held the next day. A strong showing for Moon's ruling party at the polls could boost its parliamentary position ahead of National Assembly elections in 2020.

A Trump-Kim deal on denuclearization would also lead to economic cooperation between the two Koreas, which would help revive the economy. Regional governments from Seoul to Busan are already gearing up to resume inter-Korean cooperation projects.

But if the Korean detente effort falters, Moon may find it difficult to pursue economic reforms while facing a public that has given him a pass so far on the economy.

John Burton (johnburtonft@yahoo.com), a former Korea correspondent for the Financial Times, is now a Washington, D.C.-based journalist and consultant.