beyondbrics

Moody’s, the US credit rating agency, has added its voice to the chorus arguing that South Korea is taking the wrong path in its attempts to protect ailing small-and-medium sized enterprises (SMEs).

Specifically, Moody’s grumbled in a research note on Wednesday that Seoul risked eroding profits at department stores such as Lotte and Shinsegae by demanding they reduce the rents they charge their SME tenants by between 3 and 7 per cent.

The demand fits into the broad political debate that is dominating the Korean economy. While the country’s mighty conglomerates – or chaebol – are driving respectable headline growth, the government is fretting that SMEs (which account for 90 per cent of jobs) and ordinary households are far from healthy.

Unfortunately, Seoul is favouring short-term sticking plasters rather than the long, painful surgery that South Korea’s labour market needs.

Other plans to wrap small businesses in cotton wool have included ring-fencing certain sectors from chaebol competition and creating cordons in which it is hard for supermarkets to set up and challenge (expensive) family-run shops.

Moody’s analyst Chris Park said government measures – such as those to cool inflation – had also affected corporate profits:

The announcement (on department stores) reinforces our concerns about the government’s growing market intervention in recent quarters to control retail prices across different products and segments.

For instance, oil refineries in April cut fuel prices by Won100 per litre for three months after the ministry of knowledge economy formed a task force to investigate retail fuel prices and find ways to lower prices. The price cut resulted in significant quarter-on-quarter declines in second-quarter 2011 profits for SK Innovation, GS Caltex and S-Oil.

In effect, Moody’s joins the chaebol themselves in saying the measures intended to protect the poor and small businesses could actually undermine the competitiveness of the Korean economy. This is why the debate on welfare, which is set to dominate next year’s presidential election, is potentially so interesting.

In the best case scenario, Korea’s steps towards building a real social safety net could allow the government to end its counter-productive habit of introducing haphazard support schemes in a messy, ad hoc fashion. Not only do these often arrive too late for the poor but they also harm Korea’s successful companies. A robust safety net would allow a more practical restructuring of the SMEs.

Unfortunately, Korea’s politicians have shown little interest in a measured debate on the benefits of welfare. The current discussions have not ranged beyond infantile mud-slinging about “populism” and “socialism”. That’s a pity. Welfare could yet play a big role in Korean development.

Related reading:
South Korea: An economy divided, FT
S Korea referendum opens door to welfare state, FT
Seoul school lunch vote key to election battle, FT
Samsung chief calls time on corruption, beyondbrics
Chaebols angered by calls for better governance, beyondbrics