The year is 1955, South Korea is a corrupt and unstable country, that depends heavily
on foreign aid.
Devastated by the war, South Korea was, at the time, the third poorest country in Asia.
Its per capita income equaled that of African countries such as Ghana, it was enduring the
highest inflation and lowest growth rate in the region.
Ruled with an iron fist by the authoritarian General Park Chung-Hee from 1961, expectations
for this country weren’t great.
South Korea in the sixties was a country of emigrants and even its northern neighbor looked
more promising.
But, just a second, because that’s not how things look today.
Nowadays, South Korea is the country of K-pop, K-beauty, K-fashion and K-dramas..
In short, we’re talking about a country that’s become trendy.
Folks, the Korean Wave, also known as “Hallyu” has reached virtually every corner of
the globe.
Now, don’t think that it’s only culture that has been exported, not at all.
South Korean companies such as Samsung, Hyundai or LG have also extended their tentacles across
all five continents.
And that’s no small feat.
South Korea, has been one of the greatest economic success stories of all time.
In a little over three decades, that’s just one generation, South Korea went from being
a third-world country to becoming one of the richest and most prosperous countries on earth.
So the question is, how did South Korea manage this development, how did it manage to become
such a rich country?
Well, actually No., That’s not today’s question, because we’ve already answered
that in another video, which I’ll link in the description.
In a nutshell it was thanks to the unique South Korean development model, which is characterized
by large industrial groups – the “chaebols” –along with a very demanding educational
system, an open approach to the world, a large accumulation of capital and active technological
absorption policies, that the so-called South Korean economic miracle came about.
But, folks… what brought us here today is that now this “miracle” seems to have
run its course.
In 2017 this man won at the elections, the current president, Moon Jae-in, with a fistful
of new policies that he promised would turn South Korea's economic model around.
And we aren’t talking about conventional policies, far from it.
Listen up.
AN EXHAUSTED MODEL
Yes, nowadays South Korea is one of the richest countries on the planet and... its economy
continues to grow, but its model is flawed and many indicators show a negative trend.
For example, it is expected that in 2019 the country will record the lowest growth of the
last seven years; its unemployment rate hit a nine-year high in January, wages aren’t
increasing and young people are finding it harder and harder to get a job.
None of this has been very common in South Korea over the last 30 years.
“Unfortunately, because we ourselves do not see the future of Korea as so rosy, I
do not want to bring up children in this unpromising society.
I think that mentality is persistent among many of my peers.”
Bang Seong-deok, 26, a civil engineering doctoral student.)
This alone should be cause for concern,, right?
Well... wait because there’s more.
Households.
South Korean families accumulate debt equivalent to almost 100% of the Gross Domestic Product,
which makes them the most leveraged households in any country in the world.
Because, yes…
South Koreans do save a lot, but they also invest a lot, especially in housing.
And on top of that, most jobs are so unproductive that the work day extends well into the evening.
And I’m not talking a couple of hours overtime.
Check this out: South Korea cuts 'inhumanely long' 68-hour
working week.
President introduces 52-hour work week to help improve quality of life and boost birth
rates.
The Guardian) If I don’t work overtime, my pay gets reduced.
I’d rather work more to get paid more,” Lee Myung-ryul, a 37-year-old who earns $1,800
a month at Woongbee TS)
I mean, as you can see, this model is really unsustainable.
And this is just the tip of the iceberg.
You see, the South Korean economy has some characteristics that we need to take into
account.
On the one hand, South Korea's economy is divided, so to speak, into two main parts:
The huge chaebols, which are extremely important.
The ten largest groups alone generate more than 40% of its GDP (44.2% in 2018).
These groups receive favors and privileges from the government, control financial institutions
and have behaviors that seek to limit competition within the country.
Then there’s the SMEs, small and medium enterprises.
More than 3.5 million companies that have no privileges and are subject to the enormous
power of the chaebols.
A situation that has very significant consequences.
For example, the average SME salary, which is what most South Koreans earn, is approximately
half, half that of the large company salaries and the gap keeps growing.
Why?
Well, because among other things, the big chaebols behave in a monopolistic way and
there are many suspicions of collusion between these groups and various politicians.
It goes something like this: the directors of one large group agree with the directors
of another group and get some politicians involved to limit the competition and share
the market between them.
Faced with this situation, you can already imagine that the power over SMEs is enormous...
If they don’t accept the chaebol’s conditions they simply have to shut down.
So this isn’t just a matter of salary differences, in recent years, the number of SMEs that have
declared bankruptcy has grown exponentially.
As if that weren’t enough, the technological development of countries like China is increasing
the competition and pressuring the South Korean economy, which is extremely dependent on exports.
Well, this is causing the chaebols to transfer part of their production to other countries
and replace local suppliers with foreign suppliers.
“[Korean companies] can’t compete with China and India on price and should move up
the value chain.
But the industrial evolution towards higher value-added products is not happening in the
SME sector because of their reliance on the conglomerates”.
Park Sang-in, an economics professor at Seoul National University.)
To see an example of this, we need look no further than the automotive industry.
South Korea is one of the largest car manufacturers in the world.
But in spite of the surge that this sector has experienced in recent years, South Korean
production has been falling for the last three consecutive years.
Why?
Because Hyundai, which controls 70% of the national market, is moving its production
and suppliers to countries such as Mexico and India.
In the end, folks, the privileges that the government has given to these groups and the
actions they have taken to limit competition have meant that most jobs are tied to unproductive
companies, with little efficiency and little investment in research and innovation.
And of course, if you don’t have those things, then you can’t compete with countries like
China or Vietnam, which have much lower labor costs.
And that’s generating a lot of fear in South Korea.
But... it was precisely for his promise to solve these problems that Moon Jae-in, the
current president, won the 2017 elections.
And, you know what?
He has an unconventional plan.
How does Moon Jae-in want to rescue South Korea?
Check this out.
(PRESIDENT MOON-JAE IN’S PLAN)
Dear friends of VisualPolitik, Moon Jae-in has promised to reform South Korea’s economic
model from top to bottom.
And he isn’t planning on doing it with the typical solutions of lower taxes or less regulation.
Quite the opposite.
The South Korean president’s plan is based fundamentally on two pillars.
The first consists of what its supporters call “democratizing the economy”...
… which in practice consists of raising taxes, increasing public spending, public
employment and the minimum wage.
The full cocktail.
And not precisely in small quantities.
See, in 2019 public spending will grow by more than 10%, the largest increase in a decade.
On the other hand, the minimum wage grew by 16.4% in 2018 and in 2019 it will rise by
an additional 10.9%.
And the government has already said that the raises won’t end there.
In order to finance more state spending and the hiring of 850,000 new public employees,
Moon Jae-in has boosted the corporate profits tax, which will go from 22 to 25%.
And he’s also going to raise the tax on the highest wages.
The idea that the government has is that all these measures will raise families’ incomes
and, with it, consumption.
This would reduce the dependence of South Korean companies on exports.
The problem?
Well, folks...
It's not working.
See, since Moon Jae-in began taking these measures, the economy has begun to slow down,
unemployment has started to grow and to top it all off, lower family incomes are actually
dropping.
Yes, you heard that right.
Their salaries are increasing but many workers have lost their jobs, so the net result is
that 20% of families with fewer resources earn less money today than they did before
the minimum wage raise.
All this explains why the president's approval rating has dropped from 84% in mid-2017 to
45% today.
But... folks, before we finish, there’s another great pillar in the South Korean president’s
strategy we need to look at.
Listen up
(LOOKING NORTH)
Folks, the South Korean President is convinced that his country’s future involves North
Korea.
"We are at the historical start line toward common prosperity on the Korean Peninsula
and Northeast Asia.
This is an opportunity that has come like a miracle.
It is a chance that we should never miss.”
Moon Jae-in)
Do you see this map?
In it you can see Moon Jae-in’s plans for North Korea.
He wants to promote three large economic belts to connect South Korea’s industrial core
with North Korea, with China and with Russia, through new rail lines, roads, gas pipelines,
electrical networks, etc., etc.
The investments estimated to implement just the new trains would amount to more than 40
billion dollars.
Korea anticipates that the Trans-Siberian railway will again reach Busan, the southern
tip of the Korean Peninsula where I grew up, building on the permanent peace on the Peninsula"
Moon Jae-in in an address to the Russian Duma.)
Folks, with all these projects, the president wants to improve the South Korean economy’s
commercial capabilities, while giving his companies access to North Korea's resources
and labor.
See, it’s estimated that a North Korean worker’s monthly salary is of around $60,
which is much less than what Chinese or Vietnamese workers charge.
"For Samsung Electronics, North Korea is a good candidate to set up production lines
because it can offer cheap labor, has no language barrier and has the same time [zone]," You
Seung-min, chief strategist at Samsung Securities.)
The problem?
Well Moon Jae-in isn’t having much luck here either.
While, negotiations between North Korea and the United States are going slowly, South
Korean companies aren’t convinced about investing billions of dollars in North Korea
in the short term, especially because they don’t trust Kim Jong-Un's regime.
And then there's the last question, who’s going to pay the huge price tag required to
carry out the president's plans?
To recap, this is the recipe with which Moon Jae-in wants to transform the South Korean
economic model:
More taxes, more public spending, more public employment, higher minimum wages and development
in North Korea.
Do you think it’ll work?
(Probably Yes / No, they are bad solutions / Its easy, socialism never works)
Leave your answer in the comments as well as in the survey.
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