The Peninsula

The Hidden Economic Hazard: Rent

Published February 6, 2019

By Haram Chung

Critics have pointed to the Moon government’s income-led growth strategy, specifically the two-digit percentage increase in the minimum wage, as the source of the difficulties facing the country’s small and medium enterprises (SMEs). While the increase in minimum wage may have raised operational costs for small businesses, it is far from being the only or the biggest challenge confronting SMEs. South Korea desperately needs to have a public policy discussion on rent.

The Workforce

In Korea, there is a phrase that is half in jest and a half in truth: “Regardless of college major or occupation, most people end up frying chicken.” Korea has the third highest proportion of self-employed people in the workforce among OECD nations, approximately 25%. By and large, they face a harsh reality.  According to KOSIS statistics, of the 1,000,000 new businesses that were started annually, over 800,000 have closed each year.

Wholesale and retail, alongside the hospitality industry, occupy the largest portion of the self-employed workforce. Only 57.4% of new wholesale and retail businesses survive the first year. For the hospitality industry, it is 59.4 percent. The overall survival rate for both industries drops to 26.9 percent by the fifth year. These high turnover rates correspond with higher household debt and monthly working hours for the self-employed than others in the workforce.

One solution may be to reduce the number of self-employed workers. However, this is difficult to achieve in the short term. According to a Ministry of SMEs survey, 82.6% of the self-employed were forced to start a business because they were unemployed. Furthermore, majority of new private operators’ are over the age of 50 and would face difficulties finding new employment.

Hidden Cost

There are many factors that contribute to the challenges facing SMEs, such as excess competition, little training in entrepreneurship, and an economy that prioritizes large companies. But personnel expenses and rent are the biggest operational costs of running a small business. While the minimum wage increase came as a shock to some businesses and has been the relentless focus on many pundits, rent has been a larger contributor to overhead costs.

Unlike minimum wage, rents largely follow market principles. However, without sufficient protection, landlords can be prone to abuse. Reports suggest landlords have suddenly demanded higher rent from businesses if they appear to be doing well. Similar instances have occurred if the business community in the area begin to show signs of vibrancy. This causes merchants to close their businesses due to unexpected costs.

This kind of behavior is harmful to both interested parties, building owners and tradesmen. If the very stores that helped revive the business district disappear, then the popularity of the neighborhood drops and the value of the commercial property falls.

Nonetheless, this behavior has led to high rates of vacancies in recently gentrified neighborhoods in Seoul, including Hongdae and the Garosu-gil. Even big franchisees cannot afford to pay the now-excessively high rents. As a result, both merchants and landlords suffer from excessive rent increases.

Potential Solutions

The government has offered its own solution. In order to protect small business owners who are being pushed into the streets due to soaring rents, the National Assembly passed a bill in September last year to extend the period of time rent prices can be locked in from 5 years to 10. However, paradoxically, this has created more difficulties for small business owners. During the transition period, building owners began raising their rent more severely during the initial contract period.

There are examples that offer real solutions. In Ssamji-gil, a famous landmark with old traditional shops in the Insadong neighborhood, small businesses solved the rent problem through a “shared retail” structure. Here, landlords provide lower rent in exchange for a share of the monthly revenue.

In the case of Songjeong station market in Gwangju, all interested parties made a mutual agreement to prevent rising rents. Young merchants who first revitalized the market through their food offerings and unique designs negotiated with building owners to keep rents in check and further foster the rejuvenating local businesses.

The minimum wage increase may have added challenges to self-employed workers. However, rents have also posed a serious problem that needs to be addressed. While additional legislation could be advanced to solve this challenge, it appears the voluntary adoption of a business model that values coexistence and cooperation has proven more effective.

Haram Chung is currently an Intern at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Picture from user istolethetv on Flickr

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