Brand Confucian

Today, Chosun Ilbo ran this piece on “What’s Behind Korea’s Falling Economic Ranking?”

Although such rankings are practically meaningless in our interconnected global economy, the article does make a few points that are worth considering. Once again, blue is the Chosun, black is me.

According to the World Bank’s rankings of nominal gross domestic product (the value of all goods and services produced in a country expressed in current prices) released on Monday, Korea stands at 15th place, after Australia. In 2003 Korea ranked 11th. Experts say the biggest reason behind the fall of four notches in just five years is lost growth momentum.

◆ Weakened Growth Momentum

Korea’s annual economic growth rate hovered between four to five percent over the past five years, while the economies of newly-emerging countries, such as China, Brazil and India, expanded close to 10 percent annually over the same period.

Sometime, Korea is going to have to stop comparing itself with developing nations. Granted, when the entire globe becomes developed, it is unlikely that Korea will be in the top 5 by real GDP. However, companies and the government mustn’t think about Korea’s place in terms of short-term economic growth, but of global industry share. Korean companies have been consistently poor performers when it comes to international expansion. In order to remain key players, Korean firms need to expand aggressively in the global arena over increasingly narrow product categories. Korea’s downgrade isn’t telling us about the growth trends of China, India, and Brazil, but about how Korean firms aren’t aggressively positioning themselves in these markets.

The article does hone in on the second reason for declining growth: piss-poor FDI.                         

“Korea is losing its growth momentum as investment has dropped markedly since 2000,” said Kwon Soon-woo, an economist at the Samsung Economic Research Institute (SERI). “With investment declining, Korea’s potential growth rate (the expansion that can be achieved if a country’s financial resources and labor force are put to full use) and real growth rates have been lackluster,” he added. Korea’s potential economic growth rate was 4.5 percent prior to the global financial crisis. But as investments have fallen drastically both last year and this year, it is estimated to have decreased further 

And why is investment (both domestic and foreign) declining? DongA Ilbo’s recent survey of 60 foreign firms doing business in Korea is telling. The firms give the following list of obstacles for doing business in Korea

1. Over regulation
2. Excessive corporate taxation
3. Unreasonable/unyielding labor unions
4. Language barriers
5. Instability due to North Korea
6. High cost and low productivity 

It’s telling that at least 4 out of 6 of these are completely controllable phenomena. And ‘high cost and low productivity’ could arguably be a product of the first 4 factors. 

◆ Effects of Consumer Prices and Foreign Exchange Rate 

The effects of rising consumer prices are directly reflected in nominal GDP. The more consumer prices rise, the larger nominal GDP becomes. “Until now, Korea maintained stable economic growth and consumer price levels, while Brazil, India and Russia’s nominal GDP are getting bigger due to high consumer price increases on top of high economic growth,” a Bank of Korea official said. Resource-rich Australia became the world’s 14th-largest economy last year thanks to growing exports and GDP, as raw materials prices have been climbing since 2006. 

Again, Korea needs to stop comparing itself with developing countries – inflation in Korea has been on par with or in excess of that in other developed nations. Yet the US, Germany, France, and a slew of other developed nations maintained comparative real GDP over the timeframe. 

In contrast, Korea’s consumer price increase was offset by the weak won. Nominal GDP is calculated in won and then converted into U.S. dollars. As a result, nominal GDP shrinks if a country’s currency is weaker than the dollar, even if consumer prices in that country rose. The Korean won was worth W955 against the dollar on average in 2006, W929 in 2007, but weakened to W1,103 in 2008. 

Although a factor, it must be said that the won is part of Korea’s competitive mix. Korean won value fluctuation isn’t an exclusive or completely random phenomenon. How the won fares against the pound, yen, euro, dollar, rupee, etc. is every bit as integral to Korea’s global competitiveness as is the quality of Samsung LCD TVs. It boggles my mind that the bank of Korea claims the ranking is too low due to weak currency. If BOK doesn’t take responsibility for Korea’s currency. Who will? 

◆ Need for New Growth Engines 

Experts say investment needs to rise in order for Korea to boost its global economic ranking. “Korea remains competitive in exports, but private consumption and investment remain weak. Korea’s domestic economic structure needs to be strengthened by reviving private consumption and Institute, said, “Korea’s economy could grow faster in the future, because Korean products have been increasing their share of the global market since the global financial crisis.” But Oh advised that Korea needs to tap into new growth engines in order to return to its previous rate of growth, since it would be difficult for the government to shift back to a strong won policy as officials seek to maintain the country’s current account surplus.investment,” Kwon at SERI said. Oh Moon-suk, a senior economist at the LG Economic Research. 

I absolutely agree with this assessment. Korea, like all developed nations needs new growth engines, new entrepreneurs, new ideas, new business development. Experts at places like SERI and LG Economic Research Institute are hoping these new growth engines will spawn from within their organizations. And they will. But the government needs to work on a system for promoting SME development that promotes healthy competition – not an easy task mind you, but crucial to long term growth.

Ssangyong union laborers protest layoffs

Asia Economy had the following story on public sentiment regarding the Ssangyong motors fiasco. Once again, everything in blue is my translation. Black text is commentary.

A public survey reveals that 80 percent of Korean citizens opposed governmental use of force in the Ssangyong motors bankruptcy incident.

According to a telephone survey of 1,000 men and women conducted June 15-16 by Hankil Research on behalf of the ‘National Commission for the Proper Restoration of the [Korean] Auto Industry,’ 79 percent of respondents “oppose the use of force at the [Ssangyong] bankruptcy. Those in support of using force numbered 17 percent.

70 percent of respondents indicated that, regarding the current situation, “the government is most responsible because it allowed Ssangyongs sale to Shanghai motors which stole the subsidiary’s technology without any making any investment in the local firm.” Shanghai motors was the largest culprit for 19.9 percent of respondents, and the workers union was faulted by 13.2 percent of respondents.

Twice the number of people (63.1%)opposed resolving the company’s problems through labor firings and layoffs as supported (31.1)such measures.

On whether or not public funds should be used to [bailout] Ssangyong through nationalization opposing opinions stood taughtly at 45.3 percent for and 42.6 percent against.

This survey had a 95 percent reliability with a ±3.1% standard error.

Reporter Hyeshin Ahn (안혜신) ahnhye84@asiae.co.kr

Is it sad that Ssangyong motors is going through bankruptcy and has to lay off a bunch of its factory workers? Most certainly. But layoffs are sometimes necessary to keep a company afloat. Companies need to be able to downsize when they’re in a crunch, without fearing psychotic labor unions.

And as for the whole thing being the fault of government? Well that is just more protectionist bull-shit.

Ssangyong management knew, or damned well should have known, what they were getting into when they decided to sell their shitty little company to Shanghai motors. I’m sick of hearing this load of turkey shit about how Shanghai didn’t invest any money and stole Korea’s technology. That’s not necessarily how it works people. I’m sure Shanghai motors invested all they were planning to invest on the initial purchase. After that, they saw it as local management’s job to get their act together and make the company profitable again.

It may sound harsh, but it’s a perfectly legitimate way to do business. Not to mention the international model. As a subsidiary, Ssangyong was responsible for turning a profit and repatriating it to Shanghai. That’s the way it works my friends. As for stealing technology, how can you steal something you’ve legitimately purchased?

Responsibility for the failure of Ssangyong lies chiefly with the local management, then Shanghai motors.

Responsibility for the current labor fiasco also lies with local management – they fucked up communication with their employees and have just been total idiots about their labor policies – but mostly with the labor union. Again, the government is off the hook.

All of this aside, the human suffering aspect of this story is what is most tragic. These poor workers, through no fault of their own, have lost their jobs - truly a travesty. But to make matters worse, they are lied to and rallied by a self-serving, vindictive, un-productive, and un-principled labor union that on the whole is serving as the biggest obstacle for business to move forward and the laborers to find new work.

According to this piece from Yonhap News, Korean college graduates are pining for part-time work. Work applications from so-called college graduate “white hand” (대졸백수)  candidates (”white hand” is a mildly derogatory term for students who have completed a four-year university degree but have been unable to secure permanent employment) comprised 29 percent of new 2009 applications at Part-Time Heaven (알바천국). A year ago, just 9.93 percent of part-time applicants at PTH had university educations.

May in particular saw an extreme increase in the number of college grads willing to work part time with 72 percent more 4-year degree job seeker applications, and 41% more graduate-level applications.

While I concede that this trend has certainly been influenced by the global recession as companies are hiring fewer and fewer workers, my take is that this is more evidence of the difficulty strict labor standards places on the work force in general. Archaic Korean labor standards which make downsizing and firing employees extremely arduous force companies to be more picky over full-time employee hires – and they often settle for loyalty over talent.

The increase in part time and seasonal work applications also speaks to the fact that companies are hiring part time workers and temporary people who, except for the strict labor standards, would be regular full time employees because labor regulations dealing with temporary workers are more lax.

The Korean government and the Korean labor unions need to wake up and see what pain and difficulty they are really causing. The simple fact of the matter is that Korea’s arcane labor regulations hurt companies and employees. Companies are unable to hire the talent needed. Capable workers are unable to get decent employment, and the costs of labor are sky-high.

As I’m no Korean law or labor expert, I will leave my opinion at that and refer you to Mr. Brendon Carr, who posts at Korea Law Blog, and has this interesting piece on Korean labor standards. Also check out his free Korea Employment Law FAQ, which I found quite interesting as a foreign expatriate.

In related news, the Korea times reports that 58 percent of men and 50 percent of women graduating from Korean universities also bear an average of 7.08 million won ($5,900) in student loan or other debt. These poor kids are hitting the job market at the worst possible moment. On top of that, thanks to arcane government regulations, psychotic unions, and increased competition, the cards are decidedly stacked against new workers. Something has got to give if Korea is going to remain a vibrant economy in years to come. Labor standards must change.