A lesson from the fall of Detroit

Detroit, once the mecca of the world automotive industry, filed for bankruptcy Thursday after suffering from a huge debt. Detroit had long been a world-famous industrial city having the headquarters of America’s three largest automakers of General Motors, Ford and Chrysler.

The Motor City defaulted on a loan of 18 billion dollars, equivalent to an annual budget of Seoul. In the city, about 78,000 empty buildings are abandoned and standing hideously. About 40 percent of street lights are not lit up, making the city dangerous even during the day.

The fall of Detroit is related to the stagnation of the U.S. auto industry. One of the biggest reasons for the decline in the industry is powerful labor unions. The 1950 Treaty of Detroit agreed by management and union of GM made the city a heaven of union. Under this agreement, the company began paying for pension and health insurance for even retired workers. Since then, the company began to suffer ever since. GM spent 103 billion dollars for the pension and health insurance between 1993 and 2008. As of Thursday, about 400,000 retirees had benefited from the pension and healthcare system, double of the incumbent 180,000 GM employees.

GM, Ford and Chrysler left the city to abroad or other Southern cities offering better business environment. The city lost its vigor while becoming the most unemployed city in the U.S. with 18.6 percent unemployment rate, much higher than U.S. average of 7.6 percent. Despite a sharp drop in tax revenue after population decrease caused by the auto makers, the city government kept spending the budget loosely, investing into social overhead capital projects such as monorail building.

Korea should learn a lesson from the experience of Detroit because the boom in the Korean auto industry is partly due to the slump of the U.S. car industry. This means the boom may come to an end in the mean time. However, certain labor unions in the car industry demand excessive benefits threatening that they would go on strike. At the Ulsan factory of Hyundai Motor, some workers calling for hiring non-regular workers as regular workers clashed with police while trying to march into the plant.

As seen in the case of Detroit, no prosperity of an industrial city can last forever since companies can move to places providing better environment for business. Korea’s 17 metropolitan governments and 244 local governments have debts amounting to a whopping 27.13 trillion won (24.2 billion U.S. dollars). Metropolitan and local governments are pushing forward with social overhead capital projects. If these trends continue, Korea may repeat the fall of Detroit, which was caused by excessive demand by labor unions and budget waste by the city government.