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Facing elections, Moon struggles to revive South Korean economy

Industrial wastelands defy stimulus to expose economic malaise

For years, South Korea's economy has stagnated. Whether postindustrial cities like Gunsan can prosper -- or even just survive -- will shape President Moon Jae-in’s legacy. (Photo by Jean Chung)

GUNSAN, South Korea -- In downtown Gunsan, amid the dusty machine shops, vacant storefronts and empty restaurants that make up much of the city's core, sits a gleaming, three-story operation. A sign at its entrance promises those who enter "one-stop support" on their way to a "happy new beginning."

The building is an ad-hoc, government-funded job placement center that was set up nearly two years ago to help the city's working people navigate a protracted economic crisis. Inside, 30 staff provide job placement and psychological counseling services. One program is called "I Am in Control of My Future." Another is art time for adults.

There is plenty of demand. Once an industrial boomtown, Gunsan has been reeling since a Hyundai Heavy Industries shipyard closed in 2017, and a factory for General Motors' South Korean unit was shuttered the following year.

But visitors, and the counselors attempting to help them, all run into the same obstacle: There are not enough jobs, particularly permanent, well-paid ones to replace those that have disappeared. On a recent afternoon, the center was mostly quiet, with many empty booths and only a few job seekers receiving counseling. The only openings posted to the job board were two at child care centers, two at elderly care facilities and two in construction.

"There are very few cases of laid-off workers finding new manufacturing jobs in Gunsan. Some people do day labor on construction sites or move to other parts of the country to look for jobs, but they've only succeeded in finding work on short-term contracts," said Lee Wan-kyu, who worked at the GM factory from 2006 until he was laid off in 2015.

Gunsan has been reeling since a Hyundai Heavy Industries shipyard closed in 2017, and a GM factory shuttered the following year. (Photo by Jean Chung)

In late 2018, Gunsan became the sixth former industrial boomtown to be added to the government program for "industrial crisis zones," a program with an annual budget of 1 trillion won ($801 million). The policy, a pillar of the Moon Jae-in government's plans to resuscitate the middle class through aggressive fiscal stimulus, entitles manufacturers in the cities to low-interest government loans and financial assistance for laid-off workers.

Lee, who is now a full-time Gunsan representative for the Korean Metal Workers' Union, a stalwart of organized labor in South Korea, said the effects of the government assistance have not trickled down to him and his peers.

"Gunsan's whole economy is down, and even though the government is trying to vitalize the city, the fact is that what they're doing doesn't directly benefit workers," he said.

Whether the government can find a way for postindustrial cities like Gunsan to prosper, or even just survive, will likely determine Moon's economic legacy.

The city -- for centuries, a major trading port and industrial hub -- has become a microcosm of South Korea's economic malaise. Inequality is growing, household incomes are shrinking, feeding back into weaker consumption. It is a far cry from the vision that Moon promised when he was elected in 2017, amid a massive public backlash over corruption and inequality. He entered office pledging to redistribute wealth and restore the middle class through "income-led growth." Growth, though, has been flat. In January, the unemployment rate rose for the fifth consecutive month. The global coronavirus outbreak, which has hit South Korea particularly hard, will further dampen consumption.

In April, the administration faces its most significant judgment from the public since its inauguration, in the form of legislative elections. The economy is likely to be among the most significant issues for voters.

Moon will be battling the opposition's claim that his economic policies have not taken root, as well as a customary fatigue in the electorate.

"For most South Korean presidents, these legislative elections go against them, and if that happens, their program in the National Assembly gets stuck," said Michael Breen, political analyst and author of "The New Koreans." "There's a perception that things are not going well on the economic front, and that they can't really spend their way out of the crisis."

Industrial decay

Both the GM factory and the vacated Hyundai shipyard are located on Gunsan's western edge, an industrial zone on a peninsula that juts into the Pacific, where sharp winds blow in off the sea and along the wide, treeless streets. The area was once a buzzing ecosystem of major industrial operations and smaller businesses -- suppliers, repair shops, scrap yards and restaurants -- that served them.

While there are still some large factories operating, the area is mostly quiet now. Lee Yoon-geon and two other members of his church ply these streets, inviting workers who have lost their jobs to attend services.

Lee's church preaches a gospel of prosperity to Gunsan's forlorn. "God wants us to be rich, to have a better house and better economic future," he said, pulling out an iPad to point to a highlighted a Bible verse that reads, "They will build houses and live in them. And they will plant vineyards and eat their fruitage. ... And the work of their hands my chosen ones will enjoy to the full."

It is easy to see why people might be in search of a message of hope. The spiral of lost jobs and smaller household incomes has hit adjacent sectors, too, such as retail.

Lee In-kyu, CEO of Volvik, a sports apparel company, said, "In 30 years of doing business in Gunsan, this is the worst I have ever seen it. When the Hyundai and GM plants closed, conditions really changed for us. We lost many customers. Most small businesses went under."

Lee added that he is considering closing his business later this year. "It's a vicious cycle that I don't see any way out of."

"It's a vicious cycle that I don't see any way out of"

Lee In-kyu, CEO of sports apparel company Volvik

Some laid-off workers left Gunsan. Government data shows that the city's population stood at 269,779 in January, down from 283,041 in 2016, before the Hyundai shipyard closed.

For years, South Korea has struggled with stubbornly low growth and a dearth of permanent jobs. South Korean families invest huge sums in educating their children, and upon graduation, those youths enter a fierce competition for spots at the few big companies that dominate the economy. In large cities, apartment prices are soaring, as a consensus has emerged that property ownership is the only reliable path to financial well-being. A growing number of disillusioned youths even see YouTube fame as a more realistic career option than winning a spot at a "chaebol," one of Korea's powerful family-owned conglomerates.

Seeking a way out of the downturn, the Moon administration designated five cities, all of them coastal shipbuilding hubs, as industrial crisis zones in 2017 as a slump in the shipbuilding industry, and general economic malaise, caused high unemployment in those areas. Gunsan was added to the policy in February 2018, when GM Korea announced that it would shutter its factory there.

The core of the industrial crisis zone policy is financial support for small and medium-size enterprises and laid-off workers, as well as state-led job placement services, such as the center in Gunsan. The policy allocates funds for struggling manufacturers to invest in research into new, more technology-intensive products. The Moon administration hopes the policy will act as a bridge, allowing ailing manufacturers to transition to a more financially sustainable future. Some experts argue that the government is merely propping up flagship industries whose time has passed.

"I think the traditional jobs are gone, like in Detroit," said Munseob Lee, an assistant professor of economics at University of California, San Diego's School of Global Policy & Strategy. "In the global supply chain, China is replacing Korea's role -- and Gunsan and other similar cities do not have comparative advantage globally any more in industries like shipbuilding and car manufacturing."

Gunsan is symptomatic of the broader problems dogging South Korea, which has struggled with stubbornly low growth and a dearth of permanent jobs. (Photo by Jean Chung)

The South Korean government has made bolstering SMEs a policy priority, with the hope of spurring growth and easing inequality. In 2017, the government created a ministry tasked with supporting SMEs. They are also providing funds that companies can use for the research and development of new, technology intensive products that can allow for transition away from traditional manufacturing. According to government data, SMEs account for 88% of employment and 38% of exports.

UC San Diego's Lee said the support's impact is likely to be limited. "I recommend the Korean government to target more new firms instead of [existing] SMEs," he said. "New firms are sources of job creation and productivity growth. Any current compensatory subsidy to SMEs should be temporary, if the goal is fostering growth."

There is also no conclusive evidence that government assistance can save these small companies. "Direct financial support has no big effect over the long term, and it is important to help small businesses develop their own competitiveness. Excessive government intervention could also cause inefficiencies," said Kim So-young, a professor of economics at Seoul National University.

The conglomerate-dominated structure of South Korea's economy also makes it difficult for smaller companies to compete.

"Chaebol have monopolies in many sectors, meaning that SMEs have to carve out roles as suppliers. That incentivizes them to engage in price-cutting, which then means that they don't have funds to invest in R&D or any incentive to innovate," said Park Sang-in, a professor of industrial organization at Seoul National University.

Lee Man-woo, a professor at Korea University, argues that the government should devise ways to use Gunsan's existing facilities to attract industries, such as machinery assembly and large-scale welding.

Workers laid off from manufacturing jobs may also require extensive retraining before being able to enter areas of need in South Korea's job market. "The mismatch in the skills required by firms and the skills possessed by workers could be a constraint on labor mobility from low- to high-productivity industries," Park Chang-hyun, an economist at the Bank of Korea, told Nikkei.

There is also a question over whether innovative new industries will be able to absorb all of those workers who have been laid off.

In October 2019, President Moon visited Gunsan, where he announced plans for an investment of 412.2 billion won to create an electric-vehicle production cluster in Gunsan, with the goal of creating 1,900 jobs.

The former GM factory has been taken over by Myoungshin, a South Korean auto parts maker, and the sign at its main entrance reads: "To become a global leader in electric vehicles." With financial support from the local and provincial governments, Myoungshin plans to start operations at the factory in 2021 and eventually employ 600 people.

At its peak, the factory employed 2,000, with roughly 10,000 jobs in Gunsan dependent on the plant. "Most of the parts are made in China, and just the assembly would be done here in Gunsan, so we can't expect that many jobs to come from electric vehicles," Park Jae-man, a businessman native to Gunsan and a representative on the Presidential Committee for Balanced National Development.

"The economy will be difficult in Gunsan for several years," Park told Nikkei at his office in Gunsan.

New hopes

Some entrepreneurs in Gunsan have tried to open up new sectors, particularly tourism. The city is unique among South Korean cities in that it has chosen to preserve, instead of demolishing, buildings constructed during Japan's colonial control of Korea. Nostalgia for a simpler, more prosperous time is a theme that runs through downtown Gunsan. Exterior walls are painted with murals depicting Korea decades ago, featuring fishermen and children frolicking in traditional garb.

Among the city's attractions are a colonial-era customs office and preserved Japanese-style homes, as well as the Gunsan Modern History Museum, a hulking structure on a sprawling downtown lot. Inside the museum's lobby hangs a large signboard with an oft-heard message in South Korea: "A nation that forgets its past has no future."

The museum, which opened in 2011, features exhibits that tell Gunsan's story of ascent from fishing village to colonial-era rice shipping hub to industrial boomtown. The installations present Korean history as a proud struggle against rapacious outsiders. "After the Gunsan Port was opened in 1899, Gunsan became the target port of exploitation for rice and land," one signboard reads.

"Visitors can feel and experience Korean suffering due to Japanese occupants having their ways," reads another.

Domestic tourists may well seek out these exhibits that reflect past traumas, but it is unlikely to attract an international audience.

Teum cafe run by Son Young-jun in Gunsan: Some areas are seeing a revival from entrepreneurs, who are beginning to operate new establishments with an industrial aesthetic. (Photo by Jean Chung)

Down the street, Son Young-jun now sells dainty desserts and premium coffee in a space that was once used to store rice bound for export to Japan, then later became the venue of a nightclub for soldiers from a nearby U.S. military base. When he and his younger sister took over this building near Gunsan port in 2015, it was empty.

Before he opened the cafe, called Teum, Son did some light remodeling, and the space now has the high ceilings, exposed brick walls and glazed concrete floors found in trendy establishments the world over. Son says business is brisk enough that he and his sister -- a trained baker -- employ four staff.

He deliberately preserved the building's original character. "Nowadays Korean people are really attracted to nostalgia. It lets them feel the texture of the past, back when there were fewer worries," Son, 36, said during an afternoon interview when his cafe was nearly full with customers.

Down the street from Teum, the Kimchi Black and White Photo Studio is also trading off nostalgia. The owner, Kim Jae-hun, 35, works at an interior design company full time and operates the studio on the side, either only on weekends or by appointment. "The nostalgic feel of the neighborhood gives people a break from these tough times," Kim said as he took photos of a giggling, amorous young couple.

He says employment is the biggest worry for young people in the city. "The big companies have left so there aren't enough jobs right now, but the city is still attractive in many ways. Things will eventually be OK."

For all Gunsan's attractive points, tourism is unlikely to spur a hiring boom that could restore the city's prosperity, as jobs in the sector tend to be low-wage and temporary. The best hope for the city may be that the city's SMEs may use the government-allocated R&D funds to establish a new niche that could create jobs.

"It's unfortunate for Koreans that their government focuses on providing financial support for SMEs, instead of making investments toward developing more innovative, technology-intensive products," Park Sang-in said.

Community spirit

Gunsan's job support center will continue to operate until the end of this year at least. The center is bracing for a spike in demand for job placement services later this year, when the unemployment benefits of many laid-off GM Korea workers run out.

The first five industrial crisis zones had their initial two-year designations extended by an additional two years in May, as the government determined that "overall economic recovery has been slow." Gunsan's designation will either expire or be renewed in December.

A largely empty job-seekers' center in Gunsan. At the time of visiting, only six openings were posted on the jobs board. (Photo by Jean Chung)

For now, the government is doubling down on its economic policy, having in January announced 60 trillion won in infrastructure spending to boost the economy in the run-up to April's vote.

Kim Cheol-min, who has lived his whole life in Gunsan and worked at GM Korea for 16 years until he took a buyout as part of downsizing efforts in 2017, says that the worst thing about the economic malaise is how it has decimated Gunsan's sense of community. "Back when things at the company were good, I'd get together with colleagues often -- we'd go drinking together, our families would all get together. Now, I hardly see any of them."

The father of a six-year-old girl, since taking his buyout, Kim has worked part-time jobs, filling in at small manufacturers in the Gunsan area. "Initially I thought that with my experience, I would easily find another job in the auto industry. But no one has been hiring, and there were many people who left GM who were looking for the same kinds of jobs."

Kim has considered relocating from Gunsan, as have many others, but is staying put for now. "There's no city where there are lots of manufacturing jobs, and no reason to think things would be any better in a different place. At least here is home."

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