By Robert D. Atkinson
From the 1950s to the mid-1990s, Korea pulled off an economic miracle: industrializing faster than virtually any nation in history. This process enabled Korea eventually to become the world's 10th largest economy today.
But that progress has slowed over the last 15 years and Korea's productivity performance, while still stronger than that of the U.S. and other global leaders, is slower than it was. Indeed, Korea's productivity growth from 2010 to 2019 was less than half the rate seen from 2001 to 2010.
Do Korean policymakers care about this slowdown? They should if they want to continue to catch up to the global leaders and avoid a future economic crisis from a rapidly aging population. So, the key question is how to fix it.
The first and most important step would be for the government, working with industry, to develop a Korean productivity strategy. There are a host of things governments can do to boost productivity.
But for Korea, the most obvious, and in some ways the easiest (although not politically), is to have fewer small businesses and more larger ones. Korea's biggest productivity problem is that it has far too many small, unproductive firms.
According to the Organization for Economic Cooperation and Development (OECD) in 2015, 29 percent of workers in Korea worked for micro-firms (firms with 10 or less employees), compared to around 10 percent in the U.S.
And even with the supposed dominance of the chaebols, just around 20 percent of Koreans worked for large firms with more than 250 workers, compared to around 58 percent in the U.S. In manufacturing, for every large Korean firm, there are 469 small ones. Whereas in the U.S., the ratio is just 41. In services, Korea has 1,560 small firms for every large one; compared to a ratio of just 139 to 1 in the U.S.
This situation would not be a problem if small Korean firms were anywhere near as productive as large firms. A study by the Asian Development Bank found that in 2010, small Korean firms with five to 49 workers were just 22 percent as productive as firms with over 200 workers.
According to the OECD, small service sector firms in Korea are 30 percent as productive as larger firms with over 250 workers. This is not the norm in more developed economies. In Germany and Netherlands the ratio is 84 and 94 percent, respectively. U.S. data were not available.
In short, if small firms employed fewer workers and produced less output, and larger firms had more of both, Korea's productivity and living standards would increase significantly.
If these massive numbers of small Korean firms are so inefficient, why don't they lose market share to larger firms? The short answer is government. Korean governments, national and local, use a vast array of policies to prop up small firms.
Small companies pay a corporate tax rate that is 40 percent less than large companies. Small firms are eligible for more generous investment tax credits than large firms. The government encourages banks to lend to small businesses.
In 2012, 78 percent of bank lending went to small and medium enterprises (SMEs), compared to about 25 percent in the U.S. In addition, only 21 percent of loans made to SMEs were not guaranteed or collateralized by the government. At least a few years ago, the government operated 1,300 small business support programs and 47 support measures covering taxes, marketing, and employment.
There are only two possible ways to fix this problem. The first way would be for the government to help small firms become more productive and innovative. This method would amount to an improvement, as a study by the Korea Development Institute in 2016 found that government programs to help small firms actually had the opposite effect.
This method would certainly the easy way for government officials. They could show that they are indeed friends to small business. The only problem making small firms unable to gain the economies of scale or other efficiencies of large firms is simply their size.
So that leaves letting the market to respond so that small firms lose market share to larger, more efficient firms. This would mean that governments would have to embrace the principle of size neutrality, the idea that government policies ― including government procurement, taxation, and regulatory measures ― treat all firms the same.
If a small firm can't compete with tax breaks, regulatory exemptions, special aid, and other favors, maybe they shouldn't be in business. Government welfare should be for people, not business.
Of course enacting this principle is hard, politically, or it already would have happened. In the past, the Korean economy was growing fast enough (and China was not really a competitor) that policymakers could ignore this massive anchor weight on Korean economic performance. But that anchor of inefficient small firms is getting heavier and heavier. Either cut the anchor chain or risk sinking.
Robert D. Atkinson (@RobAtkinsonITIF) is president of the Information Technology and Innovation Foundation (ITIF), a think tank for science and technology policy. The views expressed in the above article are the author's own and do not reflect the editorial direction of The Korea Times.
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But that progress has slowed over the last 15 years and Korea's productivity performance, while still stronger than that of the U.S. and other global leaders, is slower than it was. Indeed, Korea's productivity growth from 2010 to 2019 was less than half the rate seen from 2001 to 2010.
Do Korean policymakers care about this slowdown? They should if they want to continue to catch up to the global leaders and avoid a future economic crisis from a rapidly aging population. So, the key question is how to fix it.
The first and most important step would be for the government, working with industry, to develop a Korean productivity strategy. There are a host of things governments can do to boost productivity.
But for Korea, the most obvious, and in some ways the easiest (although not politically), is to have fewer small businesses and more larger ones. Korea's biggest productivity problem is that it has far too many small, unproductive firms.
According to the Organization for Economic Cooperation and Development (OECD) in 2015, 29 percent of workers in Korea worked for micro-firms (firms with 10 or less employees), compared to around 10 percent in the U.S.
And even with the supposed dominance of the chaebols, just around 20 percent of Koreans worked for large firms with more than 250 workers, compared to around 58 percent in the U.S. In manufacturing, for every large Korean firm, there are 469 small ones. Whereas in the U.S., the ratio is just 41. In services, Korea has 1,560 small firms for every large one; compared to a ratio of just 139 to 1 in the U.S.
This situation would not be a problem if small Korean firms were anywhere near as productive as large firms. A study by the Asian Development Bank found that in 2010, small Korean firms with five to 49 workers were just 22 percent as productive as firms with over 200 workers.
According to the OECD, small service sector firms in Korea are 30 percent as productive as larger firms with over 250 workers. This is not the norm in more developed economies. In Germany and Netherlands the ratio is 84 and 94 percent, respectively. U.S. data were not available.
In short, if small firms employed fewer workers and produced less output, and larger firms had more of both, Korea's productivity and living standards would increase significantly.
If these massive numbers of small Korean firms are so inefficient, why don't they lose market share to larger firms? The short answer is government. Korean governments, national and local, use a vast array of policies to prop up small firms.
Small companies pay a corporate tax rate that is 40 percent less than large companies. Small firms are eligible for more generous investment tax credits than large firms. The government encourages banks to lend to small businesses.
In 2012, 78 percent of bank lending went to small and medium enterprises (SMEs), compared to about 25 percent in the U.S. In addition, only 21 percent of loans made to SMEs were not guaranteed or collateralized by the government. At least a few years ago, the government operated 1,300 small business support programs and 47 support measures covering taxes, marketing, and employment.
There are only two possible ways to fix this problem. The first way would be for the government to help small firms become more productive and innovative. This method would amount to an improvement, as a study by the Korea Development Institute in 2016 found that government programs to help small firms actually had the opposite effect.
This method would certainly the easy way for government officials. They could show that they are indeed friends to small business. The only problem making small firms unable to gain the economies of scale or other efficiencies of large firms is simply their size.
So that leaves letting the market to respond so that small firms lose market share to larger, more efficient firms. This would mean that governments would have to embrace the principle of size neutrality, the idea that government policies ― including government procurement, taxation, and regulatory measures ― treat all firms the same.
If a small firm can't compete with tax breaks, regulatory exemptions, special aid, and other favors, maybe they shouldn't be in business. Government welfare should be for people, not business.
Of course enacting this principle is hard, politically, or it already would have happened. In the past, the Korean economy was growing fast enough (and China was not really a competitor) that policymakers could ignore this massive anchor weight on Korean economic performance. But that anchor of inefficient small firms is getting heavier and heavier. Either cut the anchor chain or risk sinking.
Robert D. Atkinson (@RobAtkinsonITIF) is president of the Information Technology and Innovation Foundation (ITIF), a think tank for science and technology policy. The views expressed in the above article are the author's own and do not reflect the editorial direction of The Korea Times.
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