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Management Report

Management reports, briefs and video-clips issued by Samsung Economic Research Institute

Going for Harmony in Korea’s Market Economy

Going for Harmony in Korea’s Market Economy

KIM Sun-Bin

Nov. 5, 2008


Welcome to our video program. I’m Sun-Bin Kim from the Public Policy Research Department.

Korea is now undergoing widening disparities in growth between different parts of the economy despite the country’s vigorous commitment to renewed growth since the financial crisis of ten years ago. Today a new global financial crisis is likely to increase pressure on less-competitive economic sectors, particularly small- and medium-sized enterprises.

Under these circumstances, the country urgently needs some first-aid measures to tide over the global financial crisis. More importantly, however, the country needs to transform itself into a mutually-beneficial economy.

Korea needs to develop a reciprocal, mutually beneficial market economy. “Reciprocal” does not refer to the unilateral transfer of wealth to less-developed economic sectors like small businesses, workers, and non-permanent workers at large companies. Rather, a reciprocal market economy refers to the exploration of a new path for growth based on considerations of mutual dependency between various actors. Today, we’ll take a close look at how the country can develop itself into a mutually beneficial market economy.

First, let’s take a look at the situations facing the Korean economy today. Economic systems introduced after the financial crisis now conflict with each other, preventing economic entities from developing in a mutually beneficial way. For example, regulations on the soundness of financial institutions introduced after the crisis made it tougher for SMEs to receive loans from banks, making them more dependent on support from the government. As a result, SMEs faced difficulties in improving productivity, causing problems in their relations with larger companies.

The establishment of a mutually beneficial market economy calls for simultaneous development of two major components of the economy, the market system and the welfare system. Such components must be structured in a way that avoids conflict. Market systems cover financial systems or markets for corporate governance, inter-firm relations, relationships between employees and employers, employment systems and vocational training/ educational schemes. Welfare on the other hand encompasses social insurance, public assistance, and social services, to enhance the economic viability of those who are socially weak and unprotected.

To achieve these goals, it will first be necessary to develop mutual savings banks, aimed at providing better funding support for SMEs. Since mutual savings banks maintain close contact with SMEs, they will be able to get information about the knowledge and business practices of SMEs that would be impossible solely with a financial statement. Large financial institutions on the other hand, tend to make decisions based on external appearances. Mutual savings banks are thus better positioned to assess the earnings potential of SMEs.

With these factors in mind, the government needs to take a regionally differentiated approach towards regulation of the financial soundness of mutual savings banks. The government also needs to take practical steps to strengthen mutual savings banks’ credit loan capability.

Second, the innovation capability of small businesses can be improved through small business oriented cooperative associations. In industrialized countries, for example, such associations are actively engaged in a variety of activities, aimed at promoting cooperative activities for small businesses in sales, purchasing, order-receipt, information gathering, and exchanges.

In contrast, Korea lacks many of these associations, which are limited to a means for joint sales. To further invigorate such associations, it will be necessary to expand the range of the beneficiaries of the government’s SME funds, which are focused only on companies themselves, towards inter-company associations. This could open the way for these associations to take a leading role in the promotion of information exchanges among small and medium-sized enterprises. Practical support for operations will also be needed, as well as joint sales and purchasing activities on behalf of SMEs exempt from the provisions of the Fair Trade Act.

Third, job training opportunities must be increased through the provision of various incentives and the active use of internship programs and public job training institutions. Unemployment benefits should be provided for a certain period of time to those who voluntarily want to enter public job training centers in their attempt to get better jobs.

Fourth, more effort will be needed to create jobs for low-income people by invigorating social welfare services. The demand for these services has been growing at a rapid pace on increased participation by women in economic activities, declining fertility rates, and an aging population. Such changes can function as a new opportunity to create new jobs for low-income people. By placing more focus on developing these areas into better job markets through the introduction of systematic job training and certification systems and the alleviation of regulations that have hindered competition among suppliers, new opportunities for work can be introduced. Community service voucher programs designed to extend help to those who are old, handicapped, new-born, or pregnant should also be expanded.

Lastly, businesses need to improve both the quality and quantity of employment through the introduction of a performance-based wage system and the extension of the retirement age. In particular, when it comes to simple assembly-line jobs like shipbuilding and automobiles, where integration of production processes is critical, a shift from a seniority-based system to a performance-based system can reap significant dividends. This can help improve workers skills and functionality to the benefit of both the company and the employee. For service and white-collar jobs, where work requires a high level of proficiency, a performance-based wage system and extension of the retirement age can also be beneficial. In this case, if wages are determined by performance, the wage gap between permanent and non-permanent workers can be narrowed, reducing the anxiety of workers over early retirement and making them more motivated in their work.

Thus far, we’ve examined various ways to improve social and economic systems in

Korea as a prerequisite to develop this country into a reciprocal, mutually beneficial market economy. We hope these improvements will lay a stronger foundation for more balanced and mutually-reinforcing growth for all participants in the economy.

Thank you for watching. I’m Sun-Bin Kim.

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