[COVID-19 Great Transformation] Saving South Korea's Economic Foundation: Self-Employed and Small Business Owners Must Be Supported... "Patchwork Support Cannot Restore"

Limitations of Policy Fund Infusion... Urgent Need to Restore Weakened Sentiment
Fundamental System Changes Like Minimum Wage System Also Required

[Asia Economy Reporters Lee Seon-ae and Cha Min-young] Voices from all walks of life are pouring out, emphasizing the need to revive self-employed individuals and small business owners, the economic backbone of South Korea, to properly welcome the 'post-COVID-19' era. They unanimously agree that it is no exaggeration to say that self-employment has collapsed due to the novel coronavirus infection (COVID-19). With the economic downturn compounded by the COVID-19 variable, the collapse of self-employed individuals and small business owners is rapidly progressing, and a swift resolution is seen as crucial to South Korea’s economic recovery. In particular, there is a surge of claims that the current biased government support measures alone cannot restore the ecosystem of self-employed individuals and small business owners.

◆Self-employment must be saved... Recovery of weakened sentiment is necessary= Experts are calling for government support measures for self-employed individuals and small business owners from both economic and non-economic perspectives. They stress the importance of focusing on supplying liquidity to enable business continuity.

Lee Yoon-jae, Chairman of the Small and Medium Business Hope Foundation (Professor of Economics at Soongsil University), said, "Liquidity supply measures for the self-employed are the most urgent, and it is especially important to select and support small business owners who cannot survive without immediate capital injection first. I believe it is time to provide comprehensive support, including tax reductions."

Professor Lee Eun-hee of Inha University’s Department of Consumer and Child Studies also emphasized, "In a situation where various small business owners, including the self-employed, are in crisis, the government’s role is crucial. For household consumption to be sustainable, labor must continue, and businesses must have continuity, so saving small business owners is the most important."

However, there is strong criticism that the current government support measures are biased. There is a growing demand for stimulus measures that the industry can tangibly feel to restore weakened sentiment.

Park Ho-jin, Secretary General of the Korea Franchise Industry Association, pointed out, "The government has introduced many support measures, but most are policies focused on low-interest loans, which is disappointing. There are support measures such as corporate tax reductions for companies and value-added tax reductions for small individual business owners, but the criteria are too narrow, so the impact is not strongly felt."

He stressed that there should be substantial direct support such as tax benefits rather than loan-based support measures. He also emphasized that the need for substantial direct support like tax benefits is closely related to the psychology of small and medium enterprises and self-employed individuals. One of the advantages of providing emergency disaster relief funds to all citizens is that it helps restore weakened consumer sentiment beyond simple livelihood support, according to Secretary General Park.

He said, "Psychology and outlook influence future plans. If the prevailing atmosphere is that business operations will become more difficult, businesses reduce employment, downsize, or close. However, if an atmosphere is created where the industry as a whole expects recovery, they will try to endure even by taking out loans. Rather than separately implementing policy fund loans, it is more effective to massively implement direct support such as tax benefits to express the government’s willingness to support and allow business owners to feel the reduction in cost burdens, after which policy fund loans can be linked."

According to a survey jointly conducted by the Ministry of Agriculture, Food and Rural Affairs and the Korea Foodservice Industry Research Institute under the Korea Foodservice Industry Association targeting dining self-employed individuals, the most desired government support by dining businesses affected by COVID-19 was in-kind support (44.4%), financial support (43.6%), and loan support (42.1%), respectively.

Seo Hyun-woo, a researcher at the Korea Foodservice Industry Research Institute, said, "Since the outbreak of COVID-19, the government has expanded support funds and lowered interest rates for dining businesses, but micro-businesses without collateral could not benefit, so the effectiveness was insufficient. What is needed is a fundamental solution that compensates for sales losses, delivery fees, rent, etc., rather than temporary support measures focused on loans and guarantees that dining business owners must repay."

Amid the deepening struggles of small business owners and self-employed individuals due to the impact of COVID-19, merchants are waiting for customers in the kitchen street of Hwanghak-dong, Seoul. Photo by Moon Honam munonam@

◆Minimum wage needs revision... Fundamental institutional changes required= There are also sharp criticisms that current small business support measures only impose tax burdens on the public. At a time when household debt burdens have increased, populist economic policies that only increase fiscal spending are mere stopgap measures. According to the Bank for International Settlements (BIS) data from last year, South Korea’s household debt was 1,827 trillion won, equivalent to 95.5% of GDP.

Professor Yang Jun-mo of Yonsei University’s Department of Economics pointed out, "Tens of trillions of won in government spending are being made to support liquidity for small business owners, but this will return as enormous debt shaking the national economy within 2 to 10 years, making things harder for small business owners. Rather, fundamental institutional changes are needed, such as revising the minimum wage system and increasing labor market flexibility."

There was also harsh criticism that fundamental changes are needed now for the dining self-employed, which the government has neglected. Seo Yong-hee, senior researcher at the Korea Foodservice Industry, said, "During the growth phase of the dining market, when demand rapidly increased but supply was limited under the licensing system, the government’s misjudgment in switching to a notification system under the assumption that the dining market’s growth would continue, leaving entry and exit solely to market logic, is the fundamental cause of the current crisis in the dining industry. The absence of entry barriers, combined with two subsequent economic crises, led to an excessive number of suppliers entering the market relative to demand, resulting in excessive and cutthroat competition," he said. He added, "The dining industry is a highly labor-intensive sector composed of low-skilled, standardized tasks, characterized by low productivity and added value, representing a typical livelihood business. These problems did not surface during the market’s growth phase due to the rapid expansion of dining consumption."

He also cited complacent responses as a cause. Even after switching to the notification system, the industry failed to flexibly respond to changes in the times, customer demands, and structural reorganization, clinging to the good old days, losing attractiveness and competitiveness, and entering a path of decline. He said, "If the dining market cannot be expanded, supply must be reduced to an appropriate level for stable sustainability, which means a return from the notification system to the licensing system is necessary. However, since it is impossible to indiscriminately throw out the 2 million workers currently employed in the dining industry, practical support measures must be prepared to help them change jobs or careers."

Seo also emphasized, "Support aimed merely at survival, rather than revival, for businesses facing closure and exit due to lack of competitiveness should be avoided (although revival potential should be assessed). One-off interventions could turn even sound businesses into failing ones."

There were also calls for support systems for retraining and reemployment for hardworking self-employed individuals. Lim Geum-ok, CEO of bhc, said, "In the post-COVID-19 era, it is necessary to improve store operations according to consumer demands, such as increasing the proportion of delivery and developing takeout or delivery-only menus. As more people prefer to eat at home rather than dining out, efforts should be made to develop customized menus reflecting their needs and to enhance food quality and management systems to gain consumer trust." He added, "The government needs to provide efficient policy support, including financial support and operating retraining programs and reemployment systems for self-employed individuals who have closed their businesses."