Behind the crisis in South Korea's
economy By David Scofield
It's hard to imagine that an economy, any
economy, growing at 5% per annum is actually in crisis,
but so it is in South Korea. On the positive side,
exports have never been stronger. South Korea's
exporters can't produce fast enough to fill global
(read: Chinese) demand. These exports are maintaining
the economy and fueling the growth on which the South
Korean economy depends. But while export growth is
keeping the country out of recession, domestic
consumption is flat, and with Korea's consumers keeping
their wallets closed, short-to-mid-term economic
strength seems unlikely.
On the surface, the
situation seems reminiscent of 1990s Japan: strong
export growth coupled with a receding domestic economy.
Unlike Japan's consumers, who chose to keep their
savings safely locked away, rebuffing government
attempts to lure them to spend, South Korea's consumers
have severely curtailed spending as a direct result of
debt.
South Korean households went from being
largely debt-free in 1997 to holding an average of
US$27,000 in debt per household in less than six years.
Almost 4 million Koreans have defaulted on credit-card
debt and household loans, a figure representing close to
10% of the country's population. The key indicator of
how Korea's households are fairing is not found in
housing prices or new-car sales, but private education
expenses. A Korean household will forestall the purchase
of a new car or delay purchasing a new house during lean
times, but nothing short of calamity can dissuade Korean
families from spending whatever they can muster on
private tutoring for their children. Yet spending on
this national staple was down almost 10% year on year in
May, an indication of just how tight things are for
Korean families.
South Korea's lack of domestic
consumption is not about to turn around. Further, the
attempts by the administration of President Roh Moo-hyun
to create the perception of an economic recovery by
changing the way statistics are calculated - moving from
a year-on-year to month-on-month comparison - a change
that will "create" a statistical bounce in the fourth
quarter as exports are traditionally strongest in this
quarter, are not going to change the fundamental reason
behind the drop in consumer sentiment and spending.
Koreans are deeply in hock and short-term fixes and
window dressing with statistics are not going to change
that.
The South Korean economy is in essence
running on one cylinder, exports, but even here the
future does not necessarily look bright. The Chinese
economy keeps steaming ahead, and as such is absorbing
South Korean exports at a record pace, but this may not
be the case indefinitely. Chinese economic officials
have indicated they are very concerned with the negative
consequences of an overheated economy and, it seems, the
political fallout of a feared economic bubble-burst in
the world's most populous country, increasingly fissured
as it is between the "gold coast" haves and the
"hinterland" have-nots. Strong government curbs on
growth in China could dramatically slow Korean exports,
sending the South Korean economy into a nosedive.
China's economy does not complement
Korea's Further, China's economy does not
complement South Korea's; rather it represents a strong
near-term competitor to Korea's most lucrative export
industries: chips, ships, cars, phones and peripherals.
The technology gap between China and South Korea is
small and closing fast, with Korea's National Science
and Technology Council indicating that the Chinese are
at most only five years away from realizing
technological parity with South Korea, and head and
shoulders ahead of Korea in terms of wage
competitiveness, a primary factor in the growing exodus
of small, medium and large Korean companies abandoning
expensive Korean labor in favor of China's tightly
controlled state unions and highly cost-effective labor
environment. Today, 30% of products made by South Korean
companies in China are exported back to South Korea. A
recent survey by the Federation of Korean Industries, a
corporate lobby group composed of Korea's largest firms,
shows that nearly half of all South Korean firms that
have invested in China plan to increase their investment
over the next five years, while further curtailing
investment in Korea.
Nevertheless, South Korean
exports are strong and, while China is a wild card in
terms of export growth, Korean firms have made
substantial headway in establishing their brands in
lucrative European and American markets. But while South
Korea's exports seem set to remain strong for the
foreseeable future, the direct benefits to the Korean
economy from these exports are far less than they used
to be.
South Korea grew from the ashes of the
Korean War 50 years ago to become the 11th-largest
trading nation on the back of strong exports and a
closed domestic economy. Households saved. The banks
lent these savings to what are today Korea's largest
firms, operating in key export industries. But in
contrast to past practice, Korea's high-tech export
industry is driven largely by technological
efficiencies: machines, not people. Thus while exports,
and by extension the economy, continue to grow, the
positive effects in terms of facility investment and
employment are decreasing. Today, Korea's export
industries are employing only a third the number of
people they retained a decade ago.
All of this
is natural, of course. As economies develop and export
focus moves to higher-value-added products in highly
competitive markets, domestic economies must shift from
a strict reliance on exports to the development of the
local economy, services and consumption. However,
shortsighted consumption policies initiated by the
administration of former president Kim Dae-jung
encouraged reckless allocation of credit with little
regard to risk. The banks understood the former
administrations's desire to use easy credit as a way to
pull the country out of the 1998 economic crisis; they
played their part all to well, proffering credit to
virtually anybody.
The Korean Board of Audit and
Inspection reported on Friday that irregularities within
the credit-card sector included 4.3 million cards issued
to more than 1.8 million people with no or negligible
incomes. The effect has been more than $375 billion in
household debt, and almost 10% of the country being in
default. A recent report by Morgan Stanley indicates the
household debt in South Korea has reached 117% of
household income, nearly 75% of the nation's gross
domestic product. Programs designed to sop up this
unserviced debt through direct and indirect government
initiatives such as the Bad Bank and Harmony Co have so
far written down debt and proffered soft loans to about
300,000 bad creditors, less than 10% of South Korea's
credit delinquents.
There is blame enough to go
around: shortsighted government policies; banks
allocating credit with little concern for risk;
consumers, many with meager incomes, accruing debt far
beyond their means to repay - all are part of the
problem. Credit-recovery programs, soft loans and other
initiatives have greatly stemmed the growth of bad debt
in South Korea, but there's a long way to go, and a
mountain of public money to mobilize before the tide
reverses, confidence returns to Korea's consumers and
sustainable growth emerges within the domestic economy.
David Scofield, former lecturer at the
Graduate Institute of Peace Studies, Kyung Hee
University, is currently conducting post-graduate
research at the School of East Asian Studies, University
of Sheffield, United Kingdom.
(Copyright
2004 Asia Times Online Ltd. All rights reserved. Please
contact content@atimes.com for
information on our sales and syndication policies.)
