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South Korea’s president is struggling to “democratise” the economy

CHO IMHO is angry. Perched on an enormous black leather chair, the director of South Korea’s association of small businesses throws up his arms in despair as he discusses the government’s economic policy. Mr Cho reserves particular ire for the recent increase in the minimum wage to 7,530 won ($6.65) an hour, 16% more than it was a year ago. The leap is the centrepiece of the government’s plan to revive the economy by boosting the incomes of the poor; further hikes are planned. Mr Cho claims many of the firms he represents are considering shutting down. Others have shed staff. “It’s crazy, a disaster,” he says.

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Mr Cho is a proud right-winger from Daegu, a nest of South Korean conservatism. His aversion to the policies of the left-leaning president, Moon Jae-in, is perhaps not surprising. But in recent months a spate of disappointing employment data and loud protests from businesses have stirred unease within the government. The finance minister, for one, has sounded surprisingly equivocal about the increases.

Mr Moon has pledged to stick to his strategy of “income-led growth”, which remains popular with voters. But he now says that the minimum wage will not rise as quickly as originally planned. He also demoted Hong Jang-pyo, an adviser who was one of the policy’s architects. Some observers believe that Chang Ha-sung, his chief of staff for policy and the other main advocate of income-led growth, may be next to go. “There are tensions between the committed reformers and those who are worried about political backlash,” says Jun Sung-in of Hongik University in Seoul. “Currently, the worriers are winning.”

Small wonder: according to South Korea’s statistics agency, the income of the lowest 20% of earners fell by 3.7% in the second quarter of this year compared with the same period last year (for high earners, it rose by 12.4%). That suggests that job losses have more than offset increased wages among those whom the policy is intended to help. There has certainly been no spurt in the growth rate, which continues to hover around 3%.

It is not obvious, however, that the increase in the minimum wage is to blame for the disappointing data. There are other potential culprits: uncertainty resulting from the trade war between America and China, worries earlier this year about South Korea’s own free trade agreement with the United States and the slowdown in construction as a result of tighter mortgage-lending rules. Still, the sudden increase may have tipped the scales.

The thrust of Mr Moon’s reforms, which seek to boost innovation and productivity at smaller firms, is broadly right. The labour market suffers from extreme polarisation between big conglomerates, called chaebol, and most other employers. The chaebol offer the most coveted jobs, but most South Koreans are employed in small firms. Productivity in such businesses, which are concentrated in the service sector, is vastly lower than in the chaebol—hence the huge gap in wages (see chart). Wages for the bottom 10% of earners have barely risen over the past two decades.

Next year’s budget envisions a 10% jump in overall expenditure, with more than a third of the extra money earmarked for social spending. The basic pension will rise, there will be more funding for childcare and small firms that hire young people will receive a subsidy. A recent report by the OECD, a club mostly of rich countries, says these measures are affordable. At 45% of GDP South Korea’s public debt is less than half the OECD average of 110%. It also spends far less on social services than most other OECD countries.

But some of the reforms may be counterproductive. The complex array of subsidies intended to help small businesses implement the minimum wage and to encourage them to hire more workers, for instance, may help boost the purchasing power of poorer South Koreans. But it may also prop up barely profitable “zombie companies”, keeping workers in marginal jobs and so undermining efforts to raise productivity.

Mr Moon has also pledged to “democratise” the economy, by which he means reduce the dominance of the chaebol. Despite much such talk from past governments, however, the assets of the five biggest have grown from the equivalent of 41% of GDP in 2001 to 60% last year, according to Park Sangin of Seoul National University. In other words, they are growing much faster than the economy as a whole.

Yet Kim Sang-jo, whom Mr Moon appointed to head the trust-busting Fair Trade Commission, has softened his rhetoric. He appears to be relying more on co-operation from the chaebol than on regulation or lawsuits to unravel their complex and opaque ownership structures. In September Mr Moon took chaebol bosses, including several who have served time for corruption, on a chummy trip to North Korea to advertise the potential for investment, should the North abandon its nuclear weapons. “All our governments have ended up making policy for the chaebol in the end,” says Mr Jun of Hongik University. “It looks like Moon will be no different.”

A third strand of Mr Moon’s reforms, to chip away at a culture of absurdly long working hours and encourage more spending on fun, is also yielding mixed results. A new presidential directive limits the maximum number of hours a week that people are allowed to work at 52, down from 68. This month a study by KT, a telecoms firm, suggested that leisure spending went up in residential areas after the directive came into force.

The amount of time people spent in or near their workplace, in contrast, fell by 55 minutes a day. This suggests that the policy is working as intended, with one important caveat. KT only detected this shift in central Seoul, where most ministries and big companies are based. In areas dominated by startups and smaller firms, there was little or no decrease in working hours. And a downside of the directive was also discernible: bars and restaurants in central Seoul reported a loss in business. Reshaping the South Korean economy for the little guy turns out to be a big challenge.

This article appeared in theAsiasection of the print edition under the headline“Promise postponed”

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