Global Market Insights | A Fisher Investments Blog

Why Aren’t Korean Workers Making More?

In a new report, South Korea’s central bank published some rather jarring findings about how corporations and regular folks have fared over the past two decades. After growing at fairly close rates during the 1990s, corporate profits and individual wages started diverging in the 2000s, with the margin widening as the decade progressed:

Exhibit: Average Annual Corporate Business Operating Profit and Wage Growth

 

Source: “Household Income Status and Implications,” Kim Young-tae and Park Jin-ho, Bank of Korea Issue Paper Series No. 2013-1, January 14, 2013. Page 4 of 12.

Given the atmosphere in Korea lately, I wouldn’t be surprised if some policymakers used this as ammunition to revive efforts to break up the country’s mega-conglomerates, known as chaebol—this data indicates the chaebols’ success is trickling down to workers more slowly.

I have a different take though—I think this chart underscores the need for Korea to drop its remaining protectionist barriers. Right now, because a few chaebol dominate Korea’s economy, there’s not much competition for workers, which gives businesses less incentive to offer higher wages and salaries. This is even more pronounced today than it was during the 1990s since some of the chaebol collapsed in Korea’s 1997 financial crisis, further lowering competition. If Korea dropped more trade barriers though, more foreign firms would likely establish Korean offices, giving Korean people more employment options. Foreign and domestic businesses alike would have to compete for talent through higher wages and salaries, and all Korean workers would benefit.

 

A Lesson in Free Trade From Korean Cinema

Free trade agreements are great for capital markets—they boost international commerce, with exporters and consumers reaping the benefits. But many believe they’re a negative for domestic producers, especially in industries that haven’t had much foreign competition. Once trade barriers are torn down, folks fear the influx of foreign alternatives will drown local producers.

This fear is somewhat reasonable—foreign products can erode domestic producers’ market share, especially if they’re cheaper (as they often are, given lower labor costs in many parts of the developing world). But this isn’t automatic. As long as domestic producers continue providing products people want, and at a reasonable price, they’ll have a market—they may just have to become more competitive in order to stay viable.

Sometimes governments will launch “trade adjustment assistance” programs to help domestic firms through the transition process, either advising on how to adjust business models or even providing temporary subsidies. But the benefits of these programs are questionable—they’re not cheap for governments to provide, and the federal support lowers businesses’ incentives to become more competitive on their own. France provides a good example: French automakers couldn’t weather competition from technologically superior South Korean cars, so François Hollande’s government decided to subsidize the industry. Why would French automakers go to the trouble of revamping their product if subsidies can keep them afloat?

Now, contrast this with the South Korean film industry.

Enterprise, Not Government Protection, Helped Film Industry Flourish

In 2006, the Korean government removed the cap on foreign films, providing a deluge of competition for Korean filmmakers. For the next four years, audiences for Korean films dwindled as Korean moviegoers opted for superior Hollywood movies.

But in 2010, Korean filmmakers fought back. They didn’t ask the government for subsidies or renewed trade barriers. Instead, they simply made better films! Filmmakers got more creative, tackling more varied genres and more interesting—and often, more uniquely Korean—subject matter. Scripts and production values improved, as did acting quality. As a result, more than 100 million Korean moviegoers saw domestic films in theaters this year, and Korean films started becoming more popular overseas.

In short, Korean filmmakers’ self-determination not only saved their industry domestically, but made it more internationally competitive—allowing it to fully benefit from Korea’s free trade agreements with the US, EU and ASEAN.

So next time anyone tells you free trade is a losing proposition, tell them Korea’s story.

Lessons From the Olympics

Allister Heath has a phenomenal editorial in Wednesday’s Telegraph:

It’s Time Britain Celebrated All of Its Winners – Whether They Are Olympians or Business Leaders

I daresay this is true everywhere in the world. As Mr. Heath writes:

There are crucial parallels between the virtues that drive sporting excellence and those that lead to business success and economic growth. Entrepreneurs and business leaders get rich, create thousands of jobs and boost the pension funds of millions by trying to excel, striving relentlessly to defeat their competitors, and through extreme dedication and hard work.

Yet we are suspicious of commercial success, which is inevitably dismissed as motivated by greed or ego, even though the personality traits, values and the belief that work is good in itself, that cause greatness in sport, are little different to those that lead to triumph in business.

…

Sport success rightly prompts admiration, but business success triggers jealousy and anger, demands for retribution and redistribution. We listen to activists who claim that inequality is bad for happiness when it comes to economic outcomes – but we rightly ignore calls for an “all-must-have-prizes culture” in sport, where we don’t seek to penalise and hold back the best.

I’d argue every country’s greatest asset is its private sector’s competitive spirit—in free, developed economies, private firms are far and away the biggest driver of economic growth. And the innate desire to be the best—competition between firms—is what drives businesses to expand. The easier it is for private firms to compete, the more they will—which means more opportunities for workers, more innovative products for consumers and, as a result, better quality of life for society as a whole. Barriers to competition, however, can stifle this.

As we all cheer on our Olympic athletes this week and next, let’s hope our governments, too, realize “economic policy must find fresh inspiration in sporting culture.” Let the games begin!

Riding the Free-Market Train

It’s often said the private sector can run a business far more efficiently than governments can, and an Italian company is setting out to prove it: In about a week, Italy’s first privately owned high-speed trains will debut, putting  some competitive heat on the state-owned rail company, Trenitalia.

The trains, operated by NTV, are primarily getting attention for their luxury stylings (details available here)—and having ridden the rather sparse French TGV high-speed trains several years ago, I imagine the leather seats, wide carriages and so-called cinema carriage will attract plenty of travelers. NTV is also making a play for foreign travelers, boasting that all employees speak English.

They’re competing on costs, too, though NTV has indicated their prices may not undercut Trenitalia’s—instead, NTV’s seeking an edge through price flexibility, similar to many airlines’ pricing model, which offers cheaper fares to those who book in advance or travel at off-peak times. Compare that to Trenitalia’s price scheme, which starts with a base fare and then applies surcharges for flexible tickets and discounts for group travel or other considerations.

On balance, it seems NTV is betting that offering an overall more pleasant experience—more comfortable travel and perhaps less booking headaches—will help them cut into Trenitalia’s market share. And make no mistake, a little healthy competition is a good thing. Until now, Trenitalia didn’t have much incentive to improve its services or pricing—it was the only option for anyone wanting to travel by train in Italy. If NTV gains significant market share, Trenitalia likely has to start competing—maybe they get newer trains, offer more legroom, cut prices, expand their service, or what have you. And as the two companies try to outdo each other (and if more service providers join the fray!), customers get more choice and perhaps better prices.

And now, the funny part: One of NTV’s principal investors, with a 20% share is none other than SNCF—France’s state-owned rail company! If that’s not capitalism and free trade at its finest, I don’t know what is. Heck, maybe if NTV’s successful, the French, too, learn the benefits of private ownership and market competition. A free-market rail revolution could be just the ticket for European travelers!

North Sea Production Stalls

For many years, American economist Art Laffer has argued that increasing tax rates in some cases causes overall tax revenues to fall. Last week’s report from the Department for Energy and Climate Change includes some evidence to support that theory. As explained in Friday’s Telegraph:

Oil platforms only pumped 947,000 barrels of oil per day in July, down from 984,000 barrels per day in June and more than 1m barrels per day in May.

The Health and Safety Executive has warned that only one in 30 of the UK's North Sea oil rigs is in a good condition. A number of large platforms have closed for major maintenance this year.

However, the business climate may also have something to do with the drop in oil output. Producers have been unhappy that the Treasury raised taxes by 12 percentage points to between 70pc and 82pc depending on the size of the fields at the Budget this spring. This has added millions of pounds to the tax bills of big producers. Whatever the cause, the fall is likely to have a substantial impact on the Chancellor's tax revenue from the oil industry, which amounted to £9bn last year.

The good news is the recent decline in North Sea oil production doesn’t necessarily need to be a long-term trend. The Chancellor increased the taxes on oil production as part of his larger austerity plan, which many believed necessary to put Britain on more sound fiscal footing. However, if these taxes are lowered once the UK’s fiscal issues have stabilized, oil companies would theoretically have incentive to resume higher production levels. Add that to ongoing oil rig maintenance and future improvements in oil extraction technology, and the North Sea can likely remain a vibrant oil producer in the long run.