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Korea's economy comes full
circle
By Caroline Cooper
Visitors to South Korea over the past year have
witnessed a new phenomenon there - a surge in domestic
demand.
Domestic demand, rather than exports,
sustained the Korean economy during the worst of the
global economic downturn in 2001 and for the first half
of 2002. But that trend is now changing. A recent Bank
of Korea report shows that domestic demand as a portion
of gross domestic product (GDP) decreased from 50.7
percent in the second quarter to 28.7 percent in the
third quarter. Exports as a percentage of GDP increased
from 49.3 percent in the second quarter to 71.3 percent
in the third quarter.
The return of exports as
the primary driver of South Korea's economic growth
brings with it new challenges and opportunities. If
trade is to sustain South Korea's growth over the
long-term, new emphasis must be placed on importing and
diversifying the country's export base.
Despite
the global economic downturn and a 6 percent drop in
real GDP growth from 2000 to 2001, South Korea managed
to experience positive growth in 2001 and through much
of last year. This was due in part to pro-growth
policies of the government and a surge in household
spending. The latter was the most surprising.
The South Korean economy, which developed from a
sustained high household savings rate, saw that rate
plummet as consumer spending and credit-card usage
increased. The South Korean government encouraged
credit-card use in part, according to the Ministry of
Finance and Economy, "to bring the taxable income of the
high-income self-employed more into the open".
The plan worked and brought with it a new credit
culture in South Korea. Most banks shifted their credit
provision policy away from corporations to households.
Koreans - both young and old - easily obtained credit
cards and began spending. The results were at first
positive - private consumption rose to never-before-seen
levels, and facilities investment increased, as did
domestic production. The negative result read across the
headlines of major global newspapers from the Wall
Street Journal to South Korean dailies such as the
Chosun Ilbo: "Credit card usage out of control".
Koreans, some not yet debt-ridden, were reported as
taking on personal debt to bail out friends in severe
financial turmoil - a sign that individualistic spending
habits had taken a firm hold. According to the Chosun
Ilbo, the average credit-card default ratio rose to a
record 7.3 percent in the third quarter.
The
Financial Supervisory Service has stepped in to curb
defaults, imposing caps on cash advance limits and
raising the reserve ratio for credit provision at
lending institutions. But these efforts coincide with a
sharp decline in consumption, sparking fears among
analysts that trends will worsen as the government
continues its efforts to reign in spiraling household
debt. A recent Bank of Korea report shows that the
consumer goods sales index (measured year on year)
declined by 25 percent from the first quarter of 2002 to
the third quarter. According to the Samsung Economic
Research Institute, the consumer expectation index and
consumer evaluation index - leading indicators of
consumer attitudes in South Korea - each declined for
the fourth straight month in October.
South
Korea has long been fearful of an increase in imports,
and that attitude does not appear to have changed.
Higher consumption over the past year resulted in an
increase in imports - both of consumer goods and capital
goods. This precipitated a rise in import prices and
fears among experts that a further increase in imports
could threaten South Korea's current account balance.
According to the Bank of Korea, this reached a surplus
of US$459.7 billion in September.
A primary
concern has been a worsening of South Korea's terms of
trade. While exports - now totaling $117 billion -
continue to outpace imports, the latter grew at a faster
rate than exports from the second quarter to the third
quarter. Bank of Korea data also show that import prices
increased at a faster rate than export prices during the
first three quarters of this year.
Analysts need
not be worried. An increase in imports is positive and
normal as an economy's shift becomes more fully
developed, and production focuses more on services than
manufacturing. Indeed, the government thinks that
imports are positive. In an op-ed piece, Commerce,
Industry, and Energy Minister Shin Kook-hwan wrote:
"Korea's trade policy has stressed the export aspect of
trade and overlooked the magnitude of imports - the
country should shift its trade policy toward an
integrated one balancing imports and exports. The
liberalization and expansion of imports contributes
greatly to the honing of national economic
competitiveness."
Proof that South Korea's
economy is changing in the right direction can be seen
in the data. Increases in imports of capital goods and
raw materials are indicative of investment by
manufacturing companies. Minister Shin argues that
"cheap, but good-quality, raw materials and machinery
component imports contribute to international
competitiveness". The biggest percentage changes in
imports from the second to third quarter were seen in
raw materials such as iron and steel and chemicals (35
percent and 77 percent increase month to month), and in
capital goods (43 percent increase), not consumer goods.
Another positive sign that South Korea's economy
is changing is that services now account for a larger
percentage of GDP than manufacturing. According to the
Bank of Korea, services as a percentage of GDP increased
from 55.8 percent in the second quarter to 64.3 percent
in the third quarter. Manufacturing as a percentage of
GDP now accounts for only 38.7 percent.
In
balancing its trade strategy, South Korea needs to
consider diversifying its export base - common advice
given by experts. South Korea's top exports are
information-technology (IT) goods (ie, computers,
semiconductors, and wireless telephony) and old
favorites - heavy-industry goods (ie, autos, ships,
steel, and chemicals). Diversifying this export base
should mean that South Korea puts priority on increasing
production of more advanced IT goods and on opening IT
service markets.
As has traditionally been the
case in South Korea, technology is first developed and
tested in the home market before being exported. As the
first country to commercialize Qualcomm's CDMA (code
division multiple access) technology in 1996, South
Korea used its domestic market to capitalize on
producing wireless handsets. These are now its top
export item. Companies such as Samsung Electronics and
LG Electronics have become world-class producers of CDMA
handsets.
Koreans' fascination with the Internet
and limited landmass provided them with a logical
testing ground also to develop a competitive
wireless-communications service industry. Capitalizing
on technology already in place from fixed-line
broadband, Korean wireless service providers such as SK
Telecom have developed wireless broadband products for
export. But they are not looking to develop new
opportunities in the United States, recognizing that the
market there is not ripe for investment and that the
economy is still in a downturn.
SK and other
Korean fixed-line and wireless-telecommunications
service providers are heading to China - now South
Korea's largest export market (including Hong Kong) -
for business opportunities. They are smart to do so,
especially as the domestic market becomes more saturated
with service options, and demand in China's nascent
wireless telecommunications industry keeps growing.
Other Korean service industries would do well to follow
suit, especially finance and retail, which could profit
from increased e-commerce made available through
advanced telecommunications service delivery in China.
Caroline Cooper is the director of
congressional affairs and trade policy at the Korea
Economic Institute (KEI) in Washington, DC. The views
expressed here are those of the author and not KEI.
(Posted with permission from KWR
International, Inc, a consulting firm specializing
in the delivery of research, communications and advisory
services.)
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