[Small Business Restructuring]② "Debt Relief Alone Won't Solve the Self-Employment Crisis... Structural Reform Is Essential"

Tens of Trillions of Won to Be Invested in Supporting Small Businesses and the Self-Employed
Complementary Policies Needed: Strengthening Entrepreneurial Capacity, Entry Restrictions, and Employment Extension
Concerns Over a Surge in Self-Employment Among Second Baby Boomers After Retirement Must Also Be Addressed

Editor's Note
Among OECD member countries, South Korea has the seventh highest proportion of self-employed individuals. Moreover, most self-employed people are concentrated in sectors with low entry barriers, such as restaurants and real estate (rental businesses). As self-employed individuals compete in these low-profit industries, the number of business closures approaches one million per year. Considering that the second baby boomer generation (born 1964?1974) began reaching the legal retirement age last year, the proportion of self-employed individuals aged 60 and over is expected to reach 2.48 million by 2032. This trend of retirees flocking to self-employment places a significant burden on the macroeconomy. To improve the self-employment issue, it is structurally necessary to extend the period of earned income, and government financial support should also be improved to encourage business closure support or industry transition. Based on statistical data and government policies, Asia Economy has analyzed the current reality of self-employment in Korea. In addition, we aim to suggest policy directions for the government regarding self-employment by presenting various expert perspectives and overseas case studies.

In a bustling area of Seodaemun-gu, Seoul, Park Sunghui (pseudonym), a woman in her early forties who runs a small coffee shop, is seriously considering closing her business. She left her job two years ago to open the coffee shop, but now earns only about half of what she used to make as an employee. After paying rent, loan interest, employee salaries, utility bills, and taxes, she finds that the money she takes home is far less than expected. Park said, "I work longer hours than when I was employed, but I make less money," adding, "With new competitors constantly opening nearby, I'm considering shutting down my shop before it's too late."

As the Lee Jaemyung administration is actively implementing a policy to write off the debts of vulnerable self-employed individuals on a large scale, there are growing calls that fundamental problems can only be solved if structural reforms of the self-employment sector are carried out simultaneously. Experts emphasize that financial support should not simply end with debt relief, but must be accompanied by a range of policy efforts, including preventing excessive entry into self-employment, strengthening entrepreneurial and management education, and encouraging continued employment for retirees.

Tens of Trillions of Won to Be Invested in Supporting Small Businesses and the Self-Employed

A significant portion of the government's supplementary budget for this year, totaling 31.7914 trillion won, is set to be allocated to supporting small businesses and the self-employed. The most notable policy is the 12.1709 trillion won in consumer coupons. To boost consumption and revitalize the domestic economy, the government plans to complete the first round of consumer coupon distribution to all citizens within this month and provide an additional 100,000 won to the bottom 90% of the population within two months, aiming to improve the stagnant self-employment sector.

The government is also accelerating the long-term delinquent debt adjustment program (bad bank), which will write off 16 trillion won in debts for vulnerable groups, including struggling self-employed individuals. By next month, financial institutions and the government will jointly invest a total of 800 billion won to establish a bad bank, and from October, will begin purchasing bonds slated for write-off. The expansion of the "New Start Fund," which helps vulnerable self-employed individuals make a fresh start, will also be fully implemented from September. The New Start Fund is a debt adjustment program established by the government to help small business owners and the self-employed recover. It targets vulnerable small business owners who operated from April 2020, when COVID-19 broke out, through June of this year. The government plans to use 700 billion won from the second supplementary budget to expand the eligibility for the New Start Fund.

The reason the government is launching such a large-scale initiative to support small businesses is that their situation is more difficult than ever. According to National Tax Service statistics, the number of businesses that filed for closure last year, including both individuals and corporations, reached 1,008,282. This is an increase of 21,795 from the previous year and marks the first time the number has surpassed one million since related statistics began in 1995. Among self-employed individuals who closed their businesses, 45% were in the retail and restaurant sectors, indicating that many self-employed people in domestic industries are facing their limits. By reason for closure, "business downturn" accounted for over 50% of all cases, making it the largest single cause.

Jeon Byungwook, a professor at the Graduate School of Taxation at the University of Seoul, assessed, "After COVID-19, the prolonged period of high interest rates has led to accumulated cost burdens, and the delay in domestic demand recovery has further worsened business conditions. The difficulties faced by self-employed individuals have been exacerbated by the increased burden of repaying excessively accumulated debt and by insufficient preparation."

Due to the severe slump in domestic demand, the number of self-employed individuals unable to repay their debts has also increased significantly. According to the Bank of Korea, the delinquency rate on loans to self-employed individuals in the first quarter of this year was 1.88%, the highest in ten years since the first quarter of 2015. Among self-employed individuals with high debt, the delinquency rate was 12.24%, the highest since the second quarter of 2013, when it stood at 13.54%. A Bank of Korea official expressed concern, saying, "The slow recovery of income due to the sluggish service sector may hinder the improvement of debt repayment capacity among self-employed households."

A closure notice is posted in front of a restaurant on a street near Seoul National University Hospital in Jongno-gu, Seoul, where pharmacies and restaurants are located. Photo by Heo Younghan younghan@

Cash Support Alone Is Not Enough: Complementary Policies Needed Such as Employment Extension, Strengthening Entrepreneurial Capacity, and Preventing Excess Entry

Experts believe that, in addition to providing financial support to small businesses and the self-employed, a variety of institutional support measures must be implemented to fundamentally resolve the stagnation in the self-employment sector.

The Korea Small Business Institute diagnosed that a "dual policy design"?actively supporting startups in high-growth potential sectors while establishing flexible exit strategies to prevent excessive entry into less competitive sectors?is a key strategy to enhance the overall stability and efficiency of industries.

It is necessary to establish institutional mechanisms such as continuous monitoring of less competitive sectors, connecting workers to job transition or re-entrepreneurship support programs when needed, and preventing unnecessary excessive entry into self-employment. In particular, the institute emphasized the need to strengthen social and labor market safety nets to minimize social shocks for those exiting self-employment, by providing unemployment benefits or retraining opportunities and linking related welfare programs. It also added that simplifying tax and administrative procedures and providing financial support would help self-employed individuals quickly decide whether to close their businesses.

Na Sumi, a research fellow at the Korea Small Business Institute, stated, "Self-employment policies need to move beyond universal survival support and provide differentiated support by industry and competitiveness," adding, "In particular, flexible exit support should be provided for less competitive sectors to enhance the overall efficiency and stability of the market."

It is also essential to prepare policies for the likely increase in self-employment among the elderly in the future. The second baby boomer generation (born 1964?1974, 9.54 million people), the largest single generation in Korea, will sequentially reach the legal retirement age of 60 over the next ten years, starting last year. The Bank of Korea expects that, given the shortage of regular jobs for retirees, a significant number of them will enter self-employment for livelihood reasons. According to Bank of Korea estimates, the number of self-employed individuals aged 60 and over, which was 1.42 million in 2015, is projected to increase to 2.48 million by 2032.

The problem is that elderly self-employed individuals are less prepared for entrepreneurship than other age groups and tend to be concentrated in the transportation, warehousing, accommodation, food, and retail sectors, which are less profitable and have higher debt ratios. Therefore, it is necessary to first create an environment where the elderly can work for extended periods in stable, wage-based jobs.

Lee Jaeho, Deputy Director General of the Bank of Korea's Economic Statistics Department, explained, "To mitigate the macroeconomic risks arising from the influx of retirees into self-employment, labor, management, and government should cooperate to discuss continued employment measures for the elderly, focusing on post-retirement reemployment systems accompanied by wage system reforms." He added, "Complementary measures could include promoting the scaling up of the service industry to create more regular jobs suitable for the elderly, or strengthening job matching between local companies suffering from labor shortages and elderly retirees."