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Government urged to ease regulations, cut corporate taxes
This is the third in a series of contributions from experts to highlight various issues President Yoon Suk-yeol and his administration should address during his presidency. ― ED.
By Kwon Tae-shin
The new administration will face a confluence of crises ― supply chain disruptions, rising protectionism and nationalism, Russia's invasion of Ukraine, tighter U.S. monetary policies, China's sluggish economic growth, and a flurry of other concurrent global shocks ― that together could trigger an economic crisis of unimaginable proportions. South Korea's export-driven economy, heavily reliant on raw material imports, is particularly exposed to exogenous shocks.
Unfortunately, the new administration has few macroeconomic tools at its disposal due to the lack of fiscal firepower in the face of snowballing debt and private sector financial vulnerability, which wouldn't be able to absorb the shock of aggressive interest rate hikes.
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| Kwon Tae-shin, vice chairman & CEO of the Federation of Korean Industries |
Exorbitant regulations, steep tax burdens and strong workers' unions have only led to the offshore exodus of Korean corporations. In the past five years, foreign direct investment (FDI) outflow from Korean companies reached $294.4 billion, roughly quadruple the FDI inflow ($74.5 billion). The consequences of fiscal stimulus driven mostly by populism and capturing more votes are unmistakable ― sovereign debt soared to a record high, surpassing 1,000 trillion won, and the country's debt-to-GDP ratio reached above 50 percent.
The new administration is tasked with navigating the hurdles posed by this multifaceted economic crisis. What should the government do?
The answer lies in a paradigmatic shift to market-driven, corporate-led growth, underpinned by autonomy, creativity and competitiveness. A looming stagflation environment, characterized by high inflation rates and economic stagnation, renders macroeconomic policies ineffective. Promoting corporate autonomy and competition to identify new growth industries and expand investments will increase total output of the economy, which in turn will stabilize inflation rates and elevate production levels. This is the solution to preventing stagflation.
More specifically, market-oriented policies must be geared toward motivating businesses and boosting entrepreneurship. Regulations on large-cap companies and growing anti-corporate sentiment have stifled entrepreneurship, so much so that Korea ranks 27th among OECD countries in entrepreneurial outlook.
A broad-based overhaul is required of regulations that persecute large businesses simply for their size in order to create a social atmosphere in which business owners feel respected, as businesses are the ones that create jobs through robust investments.
In addition, regulations must be conducive to promoting new industries. In this vein, regulatory reforms are needed to scrap positive rules (prohibition in principle and permission through exceptions) in favor of a negative scheme (permission in principle and prohibition through exceptions) to allow new industries, such as drones and robots, to flourish. South Korea's anachronistic labor market practices are also a drag on national competitiveness.
According to the IMF, OECD, WEF, IMD and other international organizations, South Korea has a rigid labor market with its two tiers. Demands for wage hikes that sideline productivity have been at the core of long-standing labor disputes. Walkouts have been so frequent that, on average, 38.7 working days are lost every year (193.5 times higher than in Japan), and companies have suffered 4 trillion won in production losses for the last five years.
Last but not least, tax reforms are imperative to strengthen the competitiveness of businesses, which will, in turn, generate jobs, particularly since companies are increasingly considering reshoring in light of production bottlenecks caused by supply chain disruptions and persistent U.S.-China tensions.
The new government must lower the top corporate income tax rate (currently at 25 percent) and expand government tax credits for large corporations' R&D programs on par with competitors such as the U.S., Japan and Germany, who offer them to all companies.
The good news is that the new administration believes a strong market economy must prevail. We hope that policies undergirded by autonomy and competition are implemented to build a vibrant market economy where businesses are free to reach their full potential. This is the only way to overcome these multifaceted challenges and put the economy on a path toward prosperity.
The writer is vice chairman & CEO of the Federation of Korean Industries.
