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The Peninsula

How South Korea Hopes to Translate Public Spending into Growth and Reform

Published January 8, 2018
Author: Kyle Ferrier
Category: South Korea

By Kyle Ferrier

South Korean President Moon Jae-in’s agenda of public sector-led economic and social reform has received much attention. The success of Moon’s strategy ultimately hinges on the aspiration that 810,000 new government jobs and providing a better work-life balance for employees will turn into more jobs and better working conditions in the private sector. Supporters of the president extol the plan’s ingenuity and his detractors criticize its lack of grounding in conventional economic thought. However, the mechanics of how public spending efforts are expected to translate to the rest of the economy has surprisingly been underreported. Interested to know more, the following reflects conversations I recently had with Korean experts on the topic.

South Koreans face a number of persistent structural issues contributing to widening social problems and sluggish domestic demand. They work the second most hours among OECD countries, yet their average real wage is about 25 percent below the OECD average. Young South Koreans are among the most educated in the world, but are among the most unemployed. A 2016 IMF study also found that the country has the highest income inequality in the Asia-Pacific region.

By hiring more public-sector employees, the Blue House hopes to tackle all of these issues.  Whereas laws on paying overtime to government employees were not strictly enforced under the previous administration, Moon is ensuring all public institutions pay overtime. This makes long work weeks less financially viable and incentivizes hiring, addressing both work-life balance and youth unemployment. Decreasing the number of hours worked could also lead to higher productivity. Further, the administration’s intent to draw on a pool of government contract workers, pledging to convert over 200,000 to permanent employees by 2020, addresses income inequality as Korea’s dual labor market is one of its biggest causes. To maximize the impact of these efforts, however, similar actions are required from the private sector.

Despite the reluctance of businesses to follow the government’s lead on hiring and spending, the Blue House seems optimistic that they will come around soon. Still a major accomplishment for Moon, the 2018 government budget passed by South Korea’s National Assembly in December was not as ambitious because of concerns raised by free-market advocates. The president originally asked to fund 12,200 jobs, but the final budget provided for 9,500. He also wanted to amend labor laws to lower the maximum number of hours worked in a week from 68 to 52, but a decision on the issue has been pushed back to this year. Moon, however, was able to raise the corporate tax rate for large corporations as promised, though this exacerbated existing business community concerns. While the administration may not have gotten everything it wanted, the budget is a major step towards shaping a new economic environment in which private companies must adapt.

The combination of both quality and quantity of government jobs is argued to be key to creating jobs in the private sector. Cutting down on hours worked for all public sector employees through hiring new ones will greatly increase their quality of life, making government offices a more attractive place to work. The success of this influencing the private sector depends on scale. The more people the government hires, the less each worker is required to work additional hours without extra pay. Thus, they will have a better quality of life and more top talent will be drawn to the public sector. If this cycle is sustained, a critical mass will be reached, forcing private companies to adopt similar measures to be competitive, thereby setting the administration’s standards throughout the economy. Moon’s pledge to create 810,000 new government jobs may at least partially be suggestive of the massive scale thought necessary for this to work.

On government spending more generally, the Blue House similarly hopes competition with the private sector will raise social welfare standards. Included in the 2018 budget were major increases to social welfare programs such as childcare and healthcare. The government hopes this will not only lead to better publicly provided care, but also compel private providers to raise their standard of care to be competitive.

Whether or not this strategy will play out as it is intended will require more time to answer, but evident now is Moon’s popularity and the government’s fiscal space to increase spending will continue to bolster his pursuit of this agenda.

Kyle Ferrier is the Director of Academic Affairs and Research at the Korea Economic Institute of America. The views expressed here are the author’s alone. 

Photo from Marcelo Druck’s photostream on flickr Creative Commons.

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