‘Amazon Effect’ Plagues South Korea Economy

The explosive penetration of e-commerce is expanding low-income jobs and thus is undermining the national economy of South Korea in general.

Through fierce price wars between internet commerce giants and traditional brick-and-mortar retail businesses, the latter have been forced to lower the salary or have gone bankrupt amid dwindling margins. This has created a vicious cycle of tough price competition and lower salaries. Such a phenomenon has been called the “Amazon effect”, Yonhap reported.

The Amazon effect is increasingly shadowing many small enterprises and self-employed businesses, making it more difficult for them to escape from having to pay their workers low wages.

According to the Korea Ministry of Trade, Industry and Energy on Sunday, e-commerce businesses are rapidly boosting their presence in the domestic retail market. Internet open market services such as Gmarket, Auction and Interpark, and social commerce businesses including Coupang, Ticket Monster and WeMakePrice recorded 18.1% average sales growth rate year-on-year in 2016, up from 16% in the previous year.

In the meantime, consumers are also spending more through e-commerce. According to the Bank of Korea, individual consumers spent about 5.5 trillion won ($49 billion) in May this year on internet shopping. This was the largest amount of spending since the central bank started to establish data on this in 2009.

The problem is that the Amazon effect may have a greater negative impact on Korea’s export-centric economic system. Large conglomerates here such as Samsung Electronics may create more high-income job opportunities by expanding their businesses while selling more products and services overseas.

On the other hand, most large-size e-commerce businesses in Korea are focused on the domestic retail market, not markets overseas, and are consequently forcing traditional retailers into price competitions. In the process, large retailers seek solutions by diversifying their retail channels online, which is difficult for smaller businesses to keep up with.

“Sadly, the rapid growth of the e-commerce industry here has been fueled by the decline of traditional retailers, especially small-sized and self-employed outlets,” an industry source said. “Many have already projected that technology will eliminate a great deal of traditional jobs, increasing the number of low-paying jobs.”