firmly in place has been confirmed through an abundance of historical evidence.
Regulation on retail giants makes a victim of consumers
Employment effect of SSMs
The government move reflects the strong outcry from nationwide organizations of mom and pop store owners that the SSMs would threaten their business. A survey of 300 grocery and other small retailers near an SSM by an association of small- and mid-sized enterprises showed that 79 percent of the respondents suffered due to the opening of an SSM and their revenue declined an average of 34 percent. This is backed by the statistics office data that the number of self-employed people fell 267,000 from a year ago to 5.765 million in April 2009.
The statistics shows an aspect of the distribution industry since the opening of the domestic market in 1996 after the World Trade Organization system was launched. The South Korean distribution industry has seen a drastic structural change as small- and mid-sized supermarkets and grocery stores diminished while big discount stores, convenience stores, and on-line shopping malls enjoyed a sharp revenue increase.
According to a report published by the Korea Chambers of Commerce and Industry in 2005, titled as "10 years of distribution market opening by statistics," the revenue of large discount stores jumped 780 percent between 1996 and 2004 while that of small neighbourhood supermarkets and grocery stores fell 19.4 percent and 12 percent, respectively. The number of large discount stores increased about 10 times from 28 to 275, whereas small retailers with less than 4 employees declined about 80,000 from 706,000.
But the growth of large discount stores had a huge employment effect. The Seoul Economic Daily reported in a special article under the title of "Distribution is a new growth engine" in June that a new large discount stores hires about 500-600 workers and creates a total of 2,500 jobs, including those in affiliated firms. Considering that large discount stores totalled 385 as of the end of 2008, we can see they have created a considerable number of jobs since the market opening.
Furthermore, consumers' behaviours have changed significantly. Many people now go to large discount stores for groceries and even durable goods, rather than neighbour supermarkets, electronics or furniture-specialized mall complexes.
Distribution industry is a new economic growth engine
With the market opening, the importance of distribution industry in the economic growth has grown significantly. A report published by the Industry Research Institute in 2006 showed that the contribution of distribution industry to the domestic gross product was 5.8 percent on average over the preceding seven years before the market opening. Then the rate rose to 7.5 percent after the liberalization. Although the economy slipped into a slump in the wake of the Asian financial crisis in the late 1990s and due to the continued weakness in domestic demand, a liberalized distribution industry became a major boost for the economic growth.
It's because the market opening has prompted economies of scale, introduction of advanced know-knows, wider adoption of high technology, intensified industry competition, and management efficiency, which brought about an improvement in the total factor productivity for the distribution industry. The advent of a more productive industry sector and intense competition among local and foreign retailers as a result of the market opening were a major driving force behind the efficiency improvement. In short, a competitive market emerging from the abolishment of entry barriers has accelerated the restructuring of the distribution industry and economic growth.
The domestic distribution industry has been developed significantly after opening the door to international retailers. However, the industry still has relatively lower level of productivity and efficiency than other areas. According to "a study on regulatory reform for higher productivity at distribution industry" published by the Korea Chamber of Commerce and Industry (KCCI) in 2003, the industry's labour productivity was higher than that of agriculture, forestry, and fishery industries but came in at only 54 percent of the average for the entire industry and 30 percent of the level for manufacturing industry. The productivity improvement pace was also behind other industrial sectors, leaving the productivity gap even wider over time.
South Korea's labour productivity in distribution industry ranks the lowest among OECD member countries in terms of purchasing power index, amounting to 34 percent of Japan, 29 percent of the U.S., and 34 percent of France. The Korea Chamber of Commerce and Industry reported in its 2009 report titled "a study on stimulating consumption and the role of business" that the productivity of South Korean distribution industry was equivalent to 25.4 percent of the U.S. and 36.6 percent of Japan, confirming that the industry put a heavy weight on the overall economic efficiency.
To improve the industry's productivity and efficiency, we need a reform on regulations that limit a sound competition and business activities. Under the circumstances, the revised bill is not desirable as it could set up another entry barrier and curb competition.
The distribution service industry is an important sector that links between production and consumption. The industry is a representative service industry that took up 6.2 percent of the GDP and hired 2.48 million employees, equivalent to about 17 percent of the entire jobs, as of 2005. With the manufacturing industry approaching a saturation point in terms of jobs and income creation, we should develop the distribution industry as our new economic growth engine.
Consumers benefit most from advanced distribution industry
The distribution industry is no longer a simple domestic demand-driven industry but develops into a global knowledge-based service industry with huge growth potential. The industry is expected to advance at a faster pace in such a direction as to provide total solution or total care to meet the demand of future consumers.
It is consumers who benefit most from advanced distribution industry. They can purchase a wider range of products at a cheaper price. This, in turn, would increase their real income, although they earn the same amount as before, as they can buy more products with a given income. The increase in real income would lead to better competitiveness in manufacturing industry by keeping down pressures of wage increase. The industry has already experienced that the benefit of a deregulated and advanced distribution industry for the entire economy is far larger than the damages to mom and pop stores.
Therefore, the government should continue to relax regulations over the industry to help it reinforce competitiveness and develop further while making the existing small retailers more competitive to minimize their losses. The revised bill should focus on ways to boost the domestic demand so that both large discount stores and small retailers can exist together, rather than introducing a new entry barrier.
By Kim Sang-ho / Professor of hotel management at Honam University
