Social Economy, Social Enterprises, and the Social Enterprise Promotion Act of Korea

 

Abstract

The paper is to understand social economy and social enterprises in a legal context, thus it is to deal with social economy, social enterprises, and the relevant bill and act, which are the Bill of Framework Act on Social Economy and the Social Enterprise Promotion Act. The paper will first investigate the concept of social economy and the bill of social economy, and then move on to discussing social enterprises; three cases of social enterprise will be introduced, and the Social Enterprise Promotion Act will be examined especially regarding the requirements to be certified as a social enterprise, supports for certified social enterprises and the efficiency of the Act.

 

I. Social Economy

1. What Is Social Economy?

First mentioned by the French economist Charles Dunoyer in 1830, the term ‘social economy’ is often used in various industries in current society. There are numerous enterprises that call themselves social enterprises, claiming that they are the major players of the social economy. The term social economy was first used by the French economist Charles Dunoyer in 1830. One of the oldest definitions of social economy stems from the study of labor class and its relations with other social classes.[1] According to Defourny et al., however, any economic phenomenon that has a social dimension and any social phenomenon that has an economic dimension can be defined as a social economy.[2]

Defourny’s definition of social economy seems quite broad, and it does not seem to make social economy distinct from the conventional concept of economy. Then what would be the most appropriate definition of social economy? It may differ from time to time and place to place, but it seems to be a good start to notice the term is a combination of ‘social’ and ‘economy’. ‘Economy’ is an area of production, distribution, and consumption of goods and services; it does not necessarily have to be a profit-making activity. ‘Social’ can be understood as creating social values or solving social problems. Thus, from the perspective of supply, social economy can be defined as ‘producing and distributing goods and services while creating social values and solving social problems.”

2. The Bill of Framework Act on Social Economy

How is social economy accepted in Korean legal framework? Some scholars argue that the Constitution already embraces the concept of social economy as the concept is reflected in Article 119.2.[3]

The proposed amendment of the Constitution presented by President Moon in March 2018 clearly states the obligation of the government to promote social economy in order to lessen bipolarization, to create more jobs, etc.[4][5] The amendment was acclaimed mainly by the ones who work in the field of social economy. Some people, however, criticized the amendment claiming that the definition of social economy is still unclear and that the Constitution should not promote the interest of any particular group.[6]

Although there is no law that directly deals with social economy, the Bill of Framework Act on Social Economy was proposed in 2016, and recently proposed again in March 2019. According to the recent bill, the Act aims to set a legal foundation for social economy, to narrow the gap between the rich and the poor, and to increase the quality of life of the people.

The bill defines social economy in accordance with the purpose of the Act; according to the bill, social economy is ‘all economic activities carried out by social and economic organizations for social integration and pursuit of common interests, such as the resolution of bipolar society, the virtuous cycle of the local economy and the creation of quality jobs, and the provision of social services through independent, autonomous and democratic organizational operations based on solidarity and cooperation among members of the society’.[7]

3. Organizations That Are to Operate Within the Domain of Social Economy

There are numerous types of organizations that are to operate within the domain of social economy. The name of some main organizations, the applicable laws, and the departments in charge are as follows.

Social Enterprise	The Social Enterprise Promotion Act	Ministry of Employment and Labor
Cooperatives(coops)	Framework Act on Cooperatives	Ministry of Economy and Finance
Agriculture Coops	Agriculture Cooperatives Act	Ministry of Agriculture, Food and Rural Affairs
Fisheries Coops	Fisheries Cooperatives Act	Ministry of Oceans and Fisheries
Korea Federation of SMEs	Small and Medium Enterprise Cooperatives Act	Ministry of SMEs and Startups
Korean Federation of Community Credit Coops	Community Credit Cooperatives Act	Ministry of Security and Public Administration
Self-support Company	National Basic Living Security Act	Ministry of Health and Welfare
Community Company	Special Act on Promotion of and Support for Urban Regeneration	Ministry of Security and Public Administration

It is notable that each organization is governed by different law and different department. This not only raises a question regarding how effectively the government can provide support to the organizations, also makes it difficult to grasp the overall activities of various organizations within social economy.

 

II. The Social Enterprise Promotion Act[8]

1. Overall Legal Framework

(1) Is the revised Constitution going to clearly state the governmental obligation to promote social economy?

(2) The Social Enterprise Promotion Act (hereinafter referred to as ‘the Act’)

– The Enforcement Decree of the Social Enterprise Promotion Act (hereinafter referred to as ‘the Decree’)

2. Background and History

 

The Act was first legislated in 2007 aiming to support social enterprises in a more structured way. Initially, social enterprises were more expected to create jobs for the poor than to create social innovations, and this is why the Ministry of Employment and Labor took charge of the Act.

Since its legislation, there have been two major amendments in 2010 and 2012, respectively. Some major changes made by 2010 amendment are as follows.

– The definition of a social enterprise was enlarged; a social enterprise was initially defined as the one that offers jobs or social services to vulnerable social groups, but the revised Act recognized the one that contributes to the community as another type of social enterprise. – Article 5-2 was added so that the Mayor/Do Governor shall establish and implement a City/Do Plan to support social enterprises in order to promote and systematically support social enterprises within his/her jurisdiction. – Article 10-2 was added so that the Minister of Employment and Labor may provide education and training for nurturing specialized personnel necessary to establish and operate social enterprises and to enhance the abilities of employees of social enterprises. – Article 20 was added so that the Korea Social Enterprise Promotion Agency(한국사회적기업진흥원) was to be established accordingly.

Some major changes made by 2012 amendment are as follows.

– The head of each public institution shall encourage preferential purchases of goods or services produced or provided by social enterprises (Article 12.1). This is to promote transactional activities between social enterprises with public institutions. – The Minister of Employment and Labor may revoke the certification of the social enterprise when certain conditions are met, and shall revoke the certification when a social enterprise obtains certification by deceit or other fraudulent means (Article 18.1). This is to increase transparency of social enterprises and to put more responsibility on them.

 

3. Purpose

The purpose of the Act is to contribute to social unity and to enhance the quality of life of the people by expanding social services that are not sufficiently supplied in our society and by creating new jobs with support of social enterprises from their establishment to operation (Article 1).

4. Definitions

The Act gives definitions of a social enterprise, a vulnerable social group, social services, an associated enterprise, and an associated local government.

A social enterprise is an entity certified as prescribed in Article 7 to be the one that pursues a social objective aimed at enhancing the quality of life of community residents by providing vulnerable social groups with social services or job opportunities or by contributing to the communities while conducting its business activities (Article 2, subparagraph 1).

Social services are services in the fields prescribed by the Presidential Decree, including educational, health, social welfare, environmental, cultural and other services similar thereto (Article 2, subparagraph 3). According to the Presidential Decree, social services can be from the fields, such as child care service, art, tourism, and sports service, forest conservation and management service, nursing and housekeeping support service, services relating to the preservation and utilization of cultural heritage, business facility management services including cleaning and employment service, etc.

5. Requirements and Supports

(1) Requirements to Be Certified as a Social Enterprise

Any entity that intends to operate a social enterprise shall meet the certification requirements prescribed in Article 8 and obtain certification from the Minister of Employment and Labor (Article 7.1).

Requirements for certification of social enterprises described in Article 8 can be summarized as follows.

– Have certain type of organizational structure such as a corporation or association as defined in the Civil Act, a company or limited partnership as defined in the Commercial Act, a corporation established under any Special Act, or a non-profit, non-governmental organization – Employ paid workers and conduct business activities, such as producing and selling goods or services – Have the primary objective to realize social objectives, such as enhancing the quality of life of community residents by providing vulnerable social groups with social services or job opportunities, or by contributing to the communities. – Have a decision-making structure in which interested parties, such as the beneficiaries of services and employees, participate. – Generate a certain level of revenue where the proportion of total revenue earned for six months immediately before the month of application shall be at least 50/100 of total labor cost disbursed by that organization during the same period. – Prepare articles of incorporation, bylaws or a similar, as referred to in Article 9 – Spend at least 2/3 of profits for social objectives when the organization generates distributable profits for each fiscal year (applicable only to companies or limited partnerships as defined in the Commercial Act)

(2) Supports Provided to Certified Social Enterprises

Article 10 to 14 state governmental supports that are to be provided to certified social enterprises. Most of the supports are to be provided by the Minister of Employment and Labor or the State and a local government, some of which can be entrusted to a government-funded institution or non-governmental organization prescribed by the Presidential Decree.

 

Article 10: Support for Business Management, etc.

The Minister of Employment and Labor may provide various supports to social enterprises, such as professional consultation and supply of information on the fields of business management, technology, taxation, labor relations, and accounting as necessary for the establishment and operation of social enterprises.

 

Article 10-2: Support for Education and Training

The Minister of Employment and Labor may provide education and training for nurturing specialized personnel necessary to establish and operate social enterprises and to enhance the abilities of employees of social enterprises.

 

Article 11: Subsidization of Facility Costs, etc.

The State and a local government may subsidize or finance land purchasing costs, facility costs, etc. as necessary for the establishment or operation of social enterprises, or lend or permit the use of State or public property or articles.

 

Article 12: Preferential Purchases by Public Institutions

The head of each public institution shall encourage preferential purchases of goods or services produced or provided by social enterprises.

 

Article 13: Tax Reduction or Exemption and Subsidization of Social Insurance Premiums

The State and local governments may grant reduction of or exemption from national or local taxes to social enterprises, as provided in relevant Tax Acts.

The State may subsidize part of the premiums for employment insurance and industrial accident compensation insurance, the insurance premiums, and the pension premiums under each relevant Act.

 

Article 14: Financial Support to Social Enterprises Providing Social Services

The Minister of Employment and Labor may provide financial support to social enterprises providing social services within budgetary limits, for personnel expenses, operating expenses, advisory fees, and other expenses incurred in operating such social enterprises by means of an open invitation and screening.

 

III. Examples of Social Enterprises

As of May 2019, 2,201 certified social enterprises exist.[9] The paper will present three certified social enterprises from different industries that are considered quite successful so far.

1. Foundation Dasomi (certified in 2007)[10]

The foundation offers co-nusring care service at a lower price to the patients hospitalized in the partner hospitals and free nursing service to low income patients. It aims to lessen the burden of private nursing service. The foundation also aims to create job opportunities for women in poverty by training them to be qualified for nursing and then by hiring them

2. Travelers’ MAP Inc. (certified in 2010)[11]

The company offers fair travel packages, which focus on introducing fair trade, local shops to travelers, making sure that travelers can fully experience local cultures, guaranteeing fair compensation to local guides, minimizing environmental harm, etc.

3. OYORI ASIA Inc. (certified in 2014)[12]

The motto of the company is ‘Social Business for Asian Women’. It runs multi-cultural restaurants while hiring women and youth in poverty, and providing Asian women who migrated to Korea with relevant job training programs. It also offers business consulting service to the youth who are willing to run their own restaurants.

 

IV. Evaluation

What has been the role of the Social Enterprise Promotion Act? How supportive has the law been to social enterprises? The final section of the paper is to answer these questions. The paper will mainly present the criticisms and proposals of the Act raised by the people who work for social enterprises during the policy debate forum[13] and the discussion meeting prior to the forum[14], both of which were held in 2017.

 

1. Criticisms

(1) The rate of increase in certified social enterprises has been stagnant whereas the number of start-ups is increasing. There are feedbacks from the people working for social enterprises that the incentive to be certified as a social enterprise is not that much for the following reasons.

1) The requirements and the process of certification are too strict; The Act requires the organizations to achieve a certain level of revenue for at least 6 months. Although this is to certify the organizations that are sustainable in doing their business, many argue that it is not easy to meet the requirement for 6 months without receiving any support. Also, the organizations are required to submit numerous evidential documents applying for the certification, which makes the application process burdensome.

2) The financial support is not lucrative enough in that 1) the support is more for labor costs than other operational costs, and it is being gradually reduced, 2) the support for business development expense has strict limits in its amount and usage, 3) the privilege of preferential purchases by public institutions is only for certain type of enterprises that engage in public purchasing.

To elaborate on the first issue, the majority of financial support is for labor costs, only for those that incur when social enterprises newly hire vulnerable social groups. Moreover, whereas the support used to be provided at full amount for the first five years of the operation, the amount has been gradually reduced; to 100% – 90% – 90% – 80% – 70%, and then to 70% – 60% – 60% -50% – 30%. Also, whereas the support used to be offered before hiring new employees, it is now being offered after hiring them, which can increase the financial burden of social enterprises.

(2) The Act is not able to screen out the organizations that are ‘truly social’. This is partly because the assessment criteria are too superficial. Also, the assessment process is not apt in evaluating substantial aspect of the organization that apply for the certification. Moreover, the voluntary reporting system and evaluation system based on business reports are not also enough to conduct a profound assessment of the organization. In fact, it has been criticized that some certified organizations are not keen on providing social values anymore.

(3) The Act’s definition of ‘social’ is too narrow. Although the Decree designates various types of services as social services that are to be provided by social enterprises, they are often not considered ‘social’ during the approval process. A fair trade coffee company, for example, was not considered social as it is not providing social services that are necessary for ‘our society’. It is said that one of the assistants of the approval process advised the company to provide vulnerable social groups with education about fair trade consumption in order to get certified as a social enterprise. Considering the fact that fair trade goods are not always affordable to all consumers, the advice seems very unrealistic.

Similarly, businesses related to fair traveling, clean energy, art and culture, IT/ICT were not considered to be social unless they hired vulnerable social groups or directly provided services to them. Indeed, about 2/3 of certified social enterprises are the job-offering type while the other 4 types account for only 1/3 altogether. This would result in the lack of diversity of social enterprises, limiting the growth of potential social enterprises.

Job-offering type (일자리제공형)	Creation·Innovation type (창의·혁신형)	Social service provide type (사회서비스제공형)	Community-contribution type (지역사회공헌형)	Mixed type (혼합형)
1,468(66.7%)	274(12.4%)	135(6.1%)	133(6.1%)	191(8.7%)

(4) Specialized Committee for Social Enterprise Promotion(사회적기업 육성전문위원회) and Korea Social Enterprise Promotion Agency(한국사회적기업진흥원) consist of academic professors and researchers, not of the people working in the field, which deters policy making and execution from being practical and suitable for the field. Currently, no single director of the Committee or the Agency has experience in the field. The people working in the field are often excluded since they are regarded as special interest party, but their participation needs to be increased to a certain level.

2. Proposals

In response to the limitations of the Act, several proposals were made during the discussion; to give a special legal personality to social enterprises, to convert from current certification system to a registration system, to diversify the type of social enterprise by actively acknowledging other types as a social enterprise, to enlarge financial support by organizing funds in a way of social finance, to activate private-public cooperation by increasing the level of participation of private sector, to strictly assess certified social enterprises if they continue to provide social values, to promote social enterprises that are based in their local community.

In fact, in June 2018, the Ministry of Employment and Labor has proposed an amendment of the Decree. According to the proposal, the required rate of providing jobs to vulnerable social groups and that of providing social services to them are to be decreased; new types of social services such as city regeneration service and environmental friendly service are to be added; the minimum period of operation required to get a certification is to be abolished.[15] This could be a good start of improving the Act.

 

References

AYORI ASIA, Ayori Asia, http://www.oyori.asia (last visited June 2019)

Bill Information, National Assembly, http://likms.assembly.go.kr/bill/main.do (last visited June 2019)

“Constitutional Amendment Proposal” (trans. by writer), Official Blog of Ministry of Government Legislation, Ministry of Government Legislation, https://moleg.tistory.com/4311 (last visited June 2019).

Dasomi Foundation Homepage, Dasomi Foundation, http://dasomi.org (last visited June 2019).

Defourny, J., et al., “The social economy: The worldwide making of a third sector”, L’économie sociale au Nord et au Sud, 1999, available at http://www.scribd.com/doc/91194590/Defourny-Develtere-SE-NorthSsouth-Cahp1-EN-1.

Hyungseok Byeon, “Problems and Suggestions of the Social Enterprise Promotion Policy: from the Perspective of the Interested Party” (trans. by writer), 2017, Joyful Union, Korea Microcredit Joyful Union, http://joyfulunion.or.kr/new/xe/archives/8771 (last visited June 2019).

KCCSE & KNSE, “Policy Debate Forum in a Celebration of 10 Years of the Legislation of the Social Enterprise Promotion Act” (trans. by writer), 2017, Korea Central Council of Social Enterprise, Korea Central Council Social Enterprise, http://ikose.or.kr/274741 (last visited June 2019).

Korea Law Translation Center, Korea Legislation Research Institute, https://elaw.klri.re.kr (last visited June 2019).

Korea Social Enterprise Promotion Agency Homepage, Korea Social Enterprise Promotion Agency, http://www.socialenterprise.or.kr (last visited June 2019).

Ministry of Employment and Labor Homepage, Ministry of Employment and Labor, www.moel.go.kr (last visited June 2019)

National Law Information Center, Ministry of Government Legislation, http://law.go.kr (last visited June 2019).

Samuel O. Idowu, et al., Dictionary of Corporate Social Responsibility, Springer (2015).

“Scholars are worried if the Constitution has to be amended when the definition of Social Economy has changed” (trans. by writer), KMIB News, 23 March 2018, available at http://news.kmib.co.kr/article/view.asp?arcid=0923921678.

The Republic of Korea Cheong Wa Dae, Office of the President, http://www1.president.go.kr (last visited June 2019).

Travelers’ MAP, Travelersmap Ltd. http://www.travelersmap.co.kr (last visited June 2019)

 

[1] Samuel O. Idowu, et al., Dictionary of Corporate Social Responsibility, Springer (2015).

[2] Defourny, J., et al., “The social economy: The worldwide making of a third sector”, L’économie sociale au Nord et au Sud (1999), available at http://www.scribd.com/doc/91194590/Defourny-Develtere-SE-NorthSsouth-Cahp1-EN-1.

[3] The Constitution, Article 119.2: “The State may regulate and coordinate economic affairs in order to maintain the balanced growth and stability of the national economy, to ensure proper distribution of income, to prevent the domination of the market and the abuse of economic power and to democratize the economy through harmony among the economic agents.”

[4] The Republic of Korea Cheong Wa Dae, Office of the President, http://www1.president.go.kr (last visited June 2019).

[5] “Constitutional Amendment Proposal” (trans. by writer), Official Blog of Ministry of Government Legislation, Ministry of Government Legislation, https://moleg.tistory.com/4311 (last visited June 2019).

[6] “Scholars are worried if the Constitution has to be amended when the definition of Social Economy has changed” (trans. by writer), KMIB News, 23 March 2018, available at http://news.kmib.co.kr/article/view.asp?arcid=0923921678.

[7] Bill Information, National Assembly, http://likms.assembly.go.kr/bill/main.do (last visited June 2019)

[8] Korea Law Translation Center, Korea Legislation Research Institute, https://elaw.klri.re.kr (last visited June 2019).

[9] Korea Social Enterprise Promotion Agency Homepage, Korea Social Enterprise Promotion Agency, http://www.socialenterprise.or.kr (last visited June 2019).

[10] Dasomi Foundation Homepage, Dasomi Foundation, http://dasomi.org (last visited June 2019).

[11] Travelers’ MAP, Travelersmap Ltd. http://www.travelersmap.co.kr (last visited June 2019)

[12] AYORI ASIA, Ayori Asia, http://www.oyori.asia (last visited June 2019)

[13] KCCSE & KNSE, “Policy Debate Forum in a Celebration of 10 Years of the Legislation of the Social Enterprise Promotion Act” (trans. by writer), 2017, Korea Central Council of Social Enterprise, Korea Central Council Social Enterprise, http://ikose.or.kr/274741 (last visited June 2019).

[14] Hyungseok Byeon, “Problems and Suggestions of the Social Enterprise Promotion Policy: from the Perspective of the Interested Party” (trans. by writer), 2017, Joyful Union, Korea Microcredit Joyful Union, http://joyfulunion.or.kr/new/xe/archives/8771 (last visited June 2019).

[15] Ministry of Employment and Labor Homepage, Ministry of Employment and Labor, www.moel.go.kr (last visited June 2019)