A visiting scholar at the Liberty Society, Aaron McKenzie lived in Seoul from 2002-2012. During that time, he studied at the KDI School of Public Policy & Management, worked as a researcher at the OECD's Korea Policy Centre, as a freelance writer and researcher for various companies in Korea, and as a lecturer in the business schools at Sogang and Yonsei Universities. He and his wife now live in Southern California, USA.
October 23, 2012
A Paper-Thin Defense Against Political Hobgoblins
By Aaron McKenzie
“The whole aim of practical politics,” wrote the American humorist H.L. Mencken, “is to keep the populace alarmed – and hence clamorous to be led to safety – by menacing it with an endless series of hobgoblins, all of them imaginary.”
The corollary is that a nation’s constitution – if indeed the nation is to be one of free individuals – must be the first line of defense against the wanton invocation of such crises, which the political class conjures chiefly as a way to increase its own power. As the ongoing tension between the Korean government and large discount retailers has shown, however, the authors of Korea's constitution did their best to avoid the sort of hard choices that must be made if citizens are to be free within a rule of law, rather than subject to the arbitrary and capricious rule of those who wield political power at any given moment.
Article 119 of the Korean Constitution begins by stipulating that the nation’s economy is to be predicated on “a respect for the freedom and creative initiative of enterprises and individuals in economic affairs.” Since the 1990s, large retail chains like E-Mart, HomePlus and Costco have steadily become the shopping stop of choice for many Korean consumers, who flock to the stores for various reasons, including convenience, selection, and quality. Not once during this time has a customer found herself kidnapped off the street and forced to buy her staple items from one these big box outlets. By applying their creative initiative, the individuals who manage and staff these stores have offered consumers an appealing shopping experience, and consumers have exercised their freedom to spend their time and money as they please. Such shifts in consumer preferences, hardly a new phenomenon, have meant that the owners of smaller, more traditional shops have had to either adapt or close down, just as the makers of traditional Korean clothes had to do when people began to prefer jeans and sneakers.
Such a preference for these megamarts, however, does not accord with the worldview of those whom economist Thomas Sowell has referred to as “the Anointed,” that is, elite members of politics, academia, and the media who believe that ordinary citizens are simply not as bright or as compassionate as they are. How else to explain the vast numbers of consumers flocking to large retailers instead of to small and traditional markets? Don’t these consumers know that a more fulfilling shopping experience, as defined by the Anointed, can be had at back alley vegetable stalls, which are slowly disappearing thanks to those soulless behemoths on the boulevard?
This, cry the Anointed, is a crisis!
The solution? Forbid large retailers to open new stores in certain regions and sectors; pressure them to refrain from selling certain items; and force them to close their doors for two days each month in an attempt to force consumers to patronize small markets. As justification for such interventions, the Anointed need only look at the second half of Article 119, which states that the state has the authority “to regulate and coordinate economic affairs in order to maintain the balanced growth and stability of the national economy, to ensure proper distribution of income, to prevent the domination of the market and the abuse of economic power, and to democratize the economy through harmony among the economic agents.” As added legal ammunition, policymakers point to Article 126, which, though it initially promises that the state will control neither the property nor the management of private enterprises, nevertheless grants the government the power to seize control of such outfits in order to meet “urgent necessities” within the national economy.
In other words, bureaucrats and politicians – the tip of the Anointed’s spear – have full authority to disrupt any pattern of peaceful exchange which does not conform to their notions of propriety. Those seeking political power most often do so out of a belief that they are qualified to boss others around, and it is a rare politician indeed who eschews additional accretions of state authority. It comes as no surprise, then, that in the eyes of the Anointed, the economy is forever “unbalanced” and short on “harmony,” thus necessitating “urgent” government action. Cloaking their proclamations in language designed to incite panic and tug at public heartstrings, the political class, ignoring the Constitution’s nod to economic and personal freedom, have arrogated to themselves the power to decide when, how, to what extent peaceful human interaction will be permitted.
At its core, a nation’s constitution is a recognition of the fact that the state holds a monopoly on the legal use of violent force, a power which may be necessary but which is also inherently dangerous and which thus must be constrained. This is particularly relevant in a country like Korea, where a history of colonialism and dictatorship should make citizens especially leery of granting any government – whether of the left, right, or center – the power to arbitrarily thrust itself into the private affairs of individuals. Yet, as the government’s punishment of large retailers shows, Korean citizens are once again losing their freedoms to political hobgoblins, against which the country’s constitution offers no protection.
Taken out of context, the government's efforts to make the large retailers shut down for two days each month looks really stupid. In context, it looks stupid, too. It surely isn't productive to cut down the large companies in order to save small storekeepers whose businesses are built on an outdated model that needs to be swept away.
But invoking the constitution to do it misses a big point... The unfairness of the chaebol trajectory in the economy over the last 40-50 years is undeniable, and this occurred through abuses under the same constitution which this article seems to believe sanctions the chaebol do whatever they want now.
Blindly advocating more freedom in the race for economic supremacy after one team has already gotten such a huge head start does nothing to address the obstacles small businesses and entrepreneurs face in the Korean economy today because of that head start of the chaebol.
So, I'm all with Aaron in his identification of the ridiculousness of trying to save traditional Korean markets by shutting down the big-box stores twice per month; but I admire the efforts of many to try to find solutions and encourage them to think even more outside "the big box" as I think the solutions to the underlying problems will be found outside the "free-market-at-all-costs" approach.
I live by both a large traditional market and a e-mart both within walking distance of my place. I prefer the traditional market for food as it is cheaper and of higher quality fresh meats vegetables etc... The market is huge with a daiso and a bunch of other store located inside. My market is full from about 11am to 10pm when it closes and the restaurants located within stay open longer.
I visit costco, for the foreign delights that are absent where I shop and rarely go to the e-mart.
I think younger Koreans who still live at home or a first time owners will be brand shoppers and the e-mart crowd as many of us were at that age.
Those with traditional markets near will continue to shop by them and the big box retailers will do just fine, the smaller markets will eventually close down as Korea moves more into the modern Farmers Market style of Europe and the U.S.
Korean law makers have very little to do especially those is Seoul, I don't see them as doing this for economic reasons but as an easy way to get a large population to vote for them with extremely meager protectionist measures. Old people vote, they also frequent and run traditional markets lots of votes for a law that only shuts down costco twice a month. Great for any politician who wants to stay in power.
Thanks, as always, for your comments.
The chaebol can be a tricky subject for those of us who push for more (market) freedoms, as they're clearly the most successful Korean firms, with most of that success coming in a largely anarchic global market where - regardless of government help back in Korea - they have to deliver the goods that consumers demand. You're right, however, that these same companies have often benefited from forms of crony capitalism that benefited them at the expense of Korean consumers and small business. Indeed, the chaebol first began to become chaebol, as we understand them today, when the government steered enormous sums of capital into their operations during the 1970s HCI drive. And as one can't create something out of nothing, these subsidies/tax breaks/etc. largely came at the expense of smaller light industries, which have struggled ever since.
On the flip side, however, the government has also overseen numerous programs to nurture SMEs, especially over the past 15 years. State support for SMEs has taken a variety of forms, including credit guarantees, direct and indirect loans, credit insurance, and venture funds. There is also batch of non-financial programs aimed at supporting SMEs, including support for research and development, infrastructure, and education and knowledge transfer. Yet, as I wrote here:
As we've seen, Korea's development model created an environment that was biased against [SME] success, built as it was on a system of tightly rigged state-chaebol relations, and the lingering effects of this structure remain evident today. In trying to atone for these historical inequities, however, the Korean government has acted in accordance with the same statist philosophy that created the problem in the first place. Until politicians and bureaucrats realize that they cannot wave their simply wave their baton and orchestrate success, they should not expect the condition of local SMEs to improve.
Rather than trying to punish the chaebol in order to help small business (the effect of which, ultimately, is to punish consumers), the government should be stripping away market distortions that favor one firm or group over another (tariffs, subsidies, tax breaks, laws regarding shareholder rights, etc.).
Aaron - OK, I'll grant you that market-distorting regulations and the like are not entirely benign. But let's suppose Korea opens everything up and makes the market exactly like you suggest. It may result in happiness and prosperity for all.
But, just in case, what's your Plan B if it actually happens that the chaebol end up taking advantage of their head start to further strengthen their stranglehold on the Korean economy? What then?
And what's your message to the owners of the 18 chicken restaurants near our place who are trying to make a go of their lives? Many of them have sunk their entire savings into these things... What do you recommend for them and the other millions of Koreans with small business but without better options who are being squeezed by the big guys?
We take our eye off the proverbial ball when we focus on the size of any given firm, rather than the cronyism - the collusion between business and government - that should be our main source of alarm.
The success of the chaebol likely stems from one - or, more likely, some combination of - the following:
1) An ability to meet their customer's demands better than anyone their competitors; and
2) Collusion with a government that restricts competition and forces customers to buy certain goods and services from the chaebol
My proposal is that we eliminate as much of #2 as possible, apply the rule of law equally, and force companies to meet the market test on their own merits.
Economic theory predicts, and history shows, that no monopoly can endure without being protected by the coercive power of the state. Ironically, the only way a company can maintain a 'monopoly' is to not behave like a monopolist. That is, when a firm offers a substandard product at a high price, it encourages new entrants who have something better and cheaper to offer - unless, of course, the government restricts competition (I wrote of one such example in an earlier piece here at KBC).
As for those chicken restaurants in your neighborhood, I'd just like to talk to the owners of shops #2-15 and find out what led them to think that this was the best of all possible business ideas.
I agree Steve. Tinkering is not going to help small merchants or really slow down the big guys. Surprising that the original article did not mention that before these mega-stores, the only choices were outrageously priced department stores and small specialty shops - what can be done in an hour today used to take all day on Chongno. On the other hand, it seems less an issue of Constitutional Law than Capitalism at work. Walmart put thousands of small, family-owned businesses into bankruptcy and had a lot of social consequences that are covered in the video link below. Drive through the US Heartland and you won't find many shoe stores, grocers or five-and-dimes within 15 miles of a Walmart.
More here: Walmart - The High Cost of Low Price.
My intent in this piece wasn't to touch on the dynamic aspects of a capitalist economy, but you've brought it up and, as it happens, it's a topic that's near and dear to my heart.
Research in the United States has shown that Wal-Mart has had no (statistically significant) impact on either the profitability or size of the small business sector in the United States. To be sure, the opening of a Wal-Mart store in a given city will result in the closure of some number of businesses which deal in similar product lines, but those specific locations tend to be replaced by other entrepreneurs (restaurants, coffee shops, art galleries, etc.). Meanwhile, while Wal-Mart tries to be a one-stop shopping destination, there are certain services/products which it does not provide. Thus, other businesses tend to cluster around Wal-Mart (oil changes, boutique clothes, restaurants, etc.), which might lead one to think that Wal-Mart actually encourages small businesses. This is because a store like Wal-Mart attracts an abundance of consumer traffic and other businesses are eager to piggyback on that. As I said, though, the evidence is that Wal-Mart is a wash where small business is concerned. For a layman's view of this story, see here.
My intuition says that something of this sort is happening in Korea. E-Mart (to take one example) seldom opens in the middle of rice fields. Rather, the area around a given mega-mart tends to be populated by numerous small businesses which, as in the case of Wal-Mart, tend to benefit from the customers attracted by the bigger store. I'd be curious, in fact, to see an analysis which showed what happened to the revenues of small businesses around a given E-Mart on the Sundays on which that E-Mart was forced to shut down.
Aaron - I wouldn't doubt that Walmart is a contributor to the overall SME economy (though, surely not to oil changes, as you've mentioned above, since the Walmarts I've seen offer that too, and not to the general stores that were put out of business before Walmart came along).
I bet though that Walmart is more effective at stimulating the surrounding economy than Emart and the others do in Korea. One reason (based on my intuition and experience, not research) is that Koreans make trips to these big-box stores in ways that don't match the US practice. We've been shopping at the Emart across town for years but not once have we ever stopped at any of the surrounding establishments; the Emart shopping experience is so all-inclusive that a trip to Emart seems to be just that: a trip to Emart and nowhere else (especially since the parking lot is located up on the roof). I bet our practice reflects the way most Koreans shop.
As I mentioned, the impact of these big box stores on the Korean SME sector is a question best addressed by empirical research. Until someone (alas, I'm gone, or I'd sign up for the project) undertakes this study, I'll remain agnostic on the matter. I just wish the government would take a similar stance instead lurching into policies that may be founded on little more than an emotional, zero-sum view of the world.
In any democracy(or any form of govt), collective wisdom of people will never equate collective wisdom of businesses. Its never a level playing field.
At least i appreciate that Govt is fulfilling its role of being an Active moderator. Everyone acknowledges that there is some balancing to be done and its very tricky. Solution (s) can be debated for their pros and cons.
One can debate whether govt's solution is WIN-WIN (or the Opposite ??)
1) Balance Mega Stores with X super stores and Y local/express stores within distance regulations (like Z km radius). i.e for every super store opened, there must be y mega stores opened and z express stores opened.
2) Do it on franchise model so that existing MOM-POP stores can be part of the chain.
3) Maintain reasonable price competitiveness among same brand mega/super/express stores.
If i can get same quality of milk/bread/vegetables at almost similar prices in local store, at least i wont be standing in mega store billing queues for basic stuff. I will divide my shopping hours between local and mega stores.
Sven - So you'd subsidize the small corner groceries with non-competitive business models in order to help them stay open to promote a more culturally and personally enriching society? It's a subjective position and not one I'm completely unsympathetic to, but the solution doesn't seem simple. From an economic perspective, there really isn't much to be said for the inefficiency of all those small corner groceries.
This reminds me of the location for 1박2일 this past Sunday - 화본마을 in 군위군 where they've preserved things like they were in the 70s and 80s. Perhaps we'll need another one of these "museum villages" in the future to remember how things were in the 2000s.