Higher Barriers to Service Industry Stifle Economy

According to a report released by the Bank of Korea, Korea ranks 116th among 175 countries and second to last among OECD member nations in terms of providing favorable conditions for starting a new business in the service sector. It is a disappointing result considering the size of Korea’s economy, the world’s eleventh largest, and its trade volume. The total cost and time spent in setting up a new business in Korea were reported to be over double the OECD’s average. What’s worse, Korea is far behind in loosening up its regulations compared to newly emerging BRICs nations, namely Brazil, Russia, India, and China.

Although many say the future of Korea’s economy lies in high value-added service industries, lower productivity and slower progress than manufacturing business hindered their development. Last year, the Korean service sector recorded an 18.8 billion dollar deficit, the largest excluding those of Germany and Japan. If a person wants to start a new service business, 70 percent of the industry must triumph against complicated legal barriers. No wonder it is difficult to spot service business start-ups, given the layers of regulations blocking them from entering the industry altogether. The year 2006 saw only 50,512 new corporations, far below 52,700 in 2003.

Barriers to sectors such as communications, finance, insurance, education, health and welfare are notoriously high. Profit-making corporations are barred from founding a hospital. Since the barriers are so high, it is impossible to expect complete competition in the industry. The lack of competition deprives consumers of the opportunity to benefit from low-cost and high-quality services. The Korea Development Institute argued that Korea can notch up its economic growth by 0.5 percent just by easing its regulations.

Korea is blessed with its people’s adaptability to service industries, making up for its lack of natural resources. If the government can provide a business-friendly environment by loosening its regulations on setting up new businesses, the nation would be able to catch two birds with one stone; keeping people and money from flowing out of the country in order to find better services overseas, and attracting foreign investors to high-quality Korean services.

Nevertheless, the government has been doing just the opposite for the last few years. Although it came up with an ambitious plan to strengthen service industry competitiveness to stop consumers from spending abroad, the grand plan bore little fruit with unrealistic measures, such as building ‘half-price golf courses.’ The government should start with removing barriers to tourism, education and medical sectors, which the industry has demanded for quite some time. The presidential candidates and their parties should also be prepared to make realistic pledges to pump energy into the industry at the end of the year.