Last updated on August 16, 2024
Over the past few weeks, there has been plenty of turmoil in Korean politics which has yet to be resolved. Ethical questions swirl around presidential nominees and fallout from a sex scandal continues to spread through the highest levels of society. The first month of President Park Geun-hye’s administration may go down in history as the most tumultuous of any democratically elected president. Worried citizens can only hope that this storm will soon pass.
At the same time, a number of odd stories in the news raise questions about increasing government power. An editorial in The Korea Times on March 11 criticized a proposal by the city of Seoul to recommend that large supermarket chains not sell 51 goods that are commonly found in small stores and open markets. These are mostly vegetables, meat, fish, dried goods, and other food products. This follows a city recommendation that the large supermarket chains close twice a month.
Another story in The Times on March 18 reported on an “overexposure decree” that gives police the authority to fine people (mostly women no doubt?) who wear revealing clothes 50,000 won. President Park approved the regulation in her first cabinet meeting.
Finally, a story in the same paper on March 19 reported on a proposed measure to restrict the opening of new franchise convenience stores within 250 meters of existing ones. The proposal draws on a similar one restricting the opening of bakery chains in an attempt to protect local independent bakeries.
Together these small stories lead to a bigger one: Excessive government intervention in private affairs. Continued intervention of this scale could threaten the Korean economy as it is struggles to regain strength amid a protracted global slump. Economies distorted by government regulation and protection tend to weaken over time as complacency replaces innovation. Consumers are the big losers because they end up paying more for less amid greater inconvenience.
One of the longstanding issues facing the Korean economy is weak domestic demand. In 2012, a record 57 percent of GDP came from exports, which is much higher than other advanced countries. Stronger domestic demand would help Korean companies become more competitive overseas while giving consumers a wider choice of products at a wider range of prices. Business, both large and small, and consumers would all benefit.
To promote such an economy, the government needs to reduce, not increase, the regulation and taxation with the focus of making it easier to do business. One simple way to strengthen domestic demand is to reduce the 10-percent VAT. As a form of tax, the VAT is regressive because it affects consumption, which everybody, to varying degrees, must do. An income tax, by contrast, is progressive because people who make more money pay higher taxes. As Korea ages, the number of people adversely affected by the VAT will increase.
Reducing the VAT to, say, 5 percent would bring immediate stimulus to the economy and would help make Korea’s tax system more progressive. The government could make up for the lost revenue by decreasing spending and/or increasing revenue through raising other taxes. The highest tax rate on corporate profits, for example, is 22 percent, which is low for an advanced nation. Compared to the BRICs, only Russia has a lower corporate tax rate. The lowest income tax bracket in Korea is 6 percent, which is high compared with other advanced nations. Lowering this to 0 percent would give struggling small businesses more breathing room.
Rather than regulating in the hope of protecting small businesses, the government should focus on tax policies that promote demand and that give small businesses incentives to innovate. Again, tax incentives are important, but low interest loans and support for infrastructure projects are also important.
Fiddling with the tax system does nothing to deal with the issue of “overexposure.” The best way to deal with “overexposure” is to do nothing at all and leave it for society to work out. Hallyu and K-Pop, the two cultural exports that government officials, including the president herself, have embraced are products of the more open society that emerged in the wake of reforms in response to the 1997 economic crisis. To grow out of the mess, Korea had to open up, and open up it did. The openness stirred creativity, and, as the cliché goes, the rest is history.
Finally, excessive government intervention in private affairs raises questions about Korea’s essential commitment to democracy. The narrative of Korean history since democratization in 1987 has been one of increasing commitment to openness and democracy. Let that narrative continue.