Credit: Public domain.
The South Korean economy has a world-leading manufacturing sector hitched to a deeply unproductive service sector. In the United Nations Industrial Development Organization’s 2021 Comparative Performance Index, South Korea’s manufacturing sector ranked third in the world, behind only China and Germany. Yet the productivity of South Korea’s service industry as of 2019 ranked 28th out of 36 OECD countries.
South Korea’s service industry is unproductive compared to other developed nations because it is made up of numerous small street-level businesses - bars, takeout joints, convenience stores - rather than high-performing service businesses like investment banks and law firms. With long hours (almost always worked by the owner and his/her family) and razor-thin margins, these small businesses are the 21st-century equivalent of subsistence farming.
The slowing economy is pushing them to the brink. In to a survey released July 3 by the Federation of Korea Industries 전국경제인연합회, 40% of small business owners said they were considering closing their business in the next three years. Respondents cited the steady decline in sales (29.4%), their inability to pay back loans (16.7%) and the unclear outlook for economic recovery (14.2%) as the main reasons for their grim expectations.
The Yellow Umbrella Fund 노란우산 공제금 has been an indicator of the struggles of small businesses. The fund acts as a government-operated retirement plan for small business owners, who can make pre-tax contributions to the fund that can later be claimed with interest when the small business owners reach 60 years old. But through June 2023, the Yellow Umbrella Fund saw KRW 554.9b (USD 427.3m) in early redemptions, a year-on-year increase of 66.4%. In other words, a record number of struggling small business owners are dipping into their retirement funds early.
