South Korean President Moon Jae-in is calling on the corporate winners of the pandemic to share some of their profits with smaller businesses that have borne the brunt of the economic pain, as he looks to address the uneven nature of the recovery.
The idea has gained traction within the ruling party in recent weeks as the K-shaped nature of the recovery has become clearer, with unprecedented public spending still failing to offset losses by mom-and-pop stores hit by social distancing restrictions.
While public support for Moon’s government partly depends on its continued efforts to tackle simmering resentment over inequality in South Korea’s economy, critics of the profit-sharing drive say it’s tantamount to corporate bullying. Business lobbies, economists and market analysts say it would distort key incentives in the corporate world and reduce South Korean firms’ attractiveness for investors.
“Korea already has a major economic inequality problem and the pandemic is by all accounts exacerbating this gap,” said Kyle Ferrier, director of academic affairs at the Korea Economic Institute of America. “The new reality in South Korea and elsewhere looks like big business will increasingly be expected to help do its part to lessen or reverse current inequality trends.”
The profit-spreading proposal aims to set legal grounds for larger companies to voluntarily contribute to a fund that can be used to help smaller, vulnerable firms in times of crisis. Advocates suggest offering companies tax incentives to chip in to the fund.
With the main details of the proposal still up in the air, it isn’t possible to pinpoint how the burden might fall on South Korea’s big companies or specific impacts the measures might have. Nor is it clear which companies would be expected to contribute or how much.
The plan would form part of a set of “social solidarity” bills pushed by the ruling party to enter legislation this year. The package also includes a proposal to allow the government to compensate small merchants for losses, in payouts that would push fiscal debt levels even higher.
In comments delivered online at the World Economic Forum’s Davos Agenda last week, Moon promoted both the profit sharing idea and government compensation plans as part of his inclusive growth strategy.
“If actualized, it would be an inclusive policy model that could help beat a new epidemic disaster like the coronavirus in the future,” Moon said.
When a similar proposal was made in 2011, then-Samsung patriarch Lee Kun-hee questioned its link to “socialist or communist” ideals. But the idea is getting more traction this time and has higher odds of being signed into law, with the ruling party enjoying a majority in the National Assembly.
The political stakes on whether such bills pass are also high. South Korea holds mayoral elections in April for Seoul and Busan, two of the nation’s largest cities, and the results will set the tone for next year’s presidential vote.
Businesses with a large online presence have generally outperformed others reliant on brick-and-mortar operations during the COVID-19 crisis. Companies including Korea’s largest messenger app operator, Kakao Corp., and global virus test-kit distributor Seegene are among those whose earnings have ballooned since the start of the pandemic.
Samsung Electronics Co., the world’s biggest maker of memory chips, also saw its profits rise last year as consumers scrambled to buy devices to work and study from home.
At the other end of the spectrum, a survey of 1,006 small companies by the Korea Federation of small- and medium-sized enterprises last quarter showed their average monthly sales had dropped by around a quarter, while profits slumped by more than a third since the virus hit.
Still, big business isn’t on board. While the contributions would be voluntary, the Federation of Korean Industries said last month it would hurt shareholders’ rights, reduce companies’ incentives to innovate and grow and distort competition, since contributions would most likely be expected from Korean businesses but not international firms like Netflix.
“In general, state intervention to change the incentive structure of firms is negative for operating efficiency and equity valuations,” said Rory Green, an economist at TS Lombard.
“The country’s largest firms already trade at a ‘Korea discount’ relative to international peers, largely due to opaque corporate governance. Adding profit sharing pressure or obligations will mean a deeper discount and lower valuations.”
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