SOUTH KOREA AFTER THE 1997-1998 ASIAN FINANCIAL CRISIS
In the late 1990s, the economy of South Korea bounced back much quicker than expected after the 1997-1998 Asian Financial Crisis In 1998, there was rising unemployment, negative economic growth, and negative consequences of reforms of the financial sector.
Donald N. Clark wrote in “Culture and Customs of Korea”: “Korea's credit rating sank suddenly to junk bond status. This was a serious humiliation and it led to significant restructuring, part of it necessitated by the conditions imposed by the IMF. President Kim Dae-jung did much to restructure the banking industry and straighten out the investment practices of the chaebol conglomerates, but labor unions continue to resent bearing so much of the pain of the crisis and the conglomerates are reluctant to part with their inbred dealings. South Korea has entered the twenty-first century on a much more stable economic footing, but if the reforms do not go far enough South Korea will remain dangerously vulnerable to outside forces that can cause another cycle of boom and bust. [Source: “Culture and Customs of Korea” by Donald N. Clark, Greenwood Press, 2000]
The economy began to recover in 1999. That year, gross domestic product (GDP) reached US$406.7 billion. The South Korean economy was ranked thirteenth in the world and per capita GDP ranked thirtieth. South Korea paid back its IMF loan three years ahead of schedule. Growth was 4 percent in 2005. [Source: Chunghee Sarah Soh, “Countries and Their Cultures”, The Gale Group Inc., 2001]
The 1997 economic crisis resulted in a reduction of pollution as people drove less, car sales plummeted, factories reduced their output or were closed, construction ceased and development projects were scrapped. But not all news was good. Spending on the environment fell from $28 per person to $19.
China was been a major engine for growth in South Korean as Chinese bought Korean cars, electronic goods and other products. South Korea also made major advances against rival Japan in things like televisions and cell phones. The “Worldmark Encyclopedia of Nations” reported: “South Korea was assisted in weathering the crisis of confidence with a $58 billion international support program mobilized through the IMF, the World Bank, and the Asia Development Bank (ADB). In May 1998, the government introduced a five-year liberalization program covering 11 economic sectors, including the previously closed petroleum, insurance and financial services sectors. The ROK's recovery from the Asian financial crisis was remarkably strong, aided by a show of international confidence and its government's embrace of trade and investment liberalization reforms. [Source: Worldmark Encyclopedia of Nations, Thomson Gale, 2007]
“However, the collapse of the dot.com boom and the global economic slowdown that began in 2001, combined with the aftermath of the 11 September 2001 terrorist attacks on the United States, dealt serious blows to the economy's forward momentum. Progress in reducing the share of nonperforming loans (NPLs) in the financial sector and reducing dependency on foreign borrowing were brought to a halt. At the end of March 2001, total external liabilities were at a record $137 billion. However, the ROK continued to maintain its net creditor position, as it has since September 1999. Foreign assets totaled an estimated $188 billion. Reserves of foreign exchange and gold amounted to $220.1 billion in 2005. As of June 2005, external debt stood at $188.4 billion.
“The ROK government in 2003 announced that the four pillars of its development strategy were (1) consistently promoting technological innovation; (2) continued development of a fair and transparent market system; (3) social and cultural norms based on trust; and (4) peace and prosperity in East Asia. President Roh Moo Hyun, elected in 2003, campaigned on a proreform image and platform, but the chaebol (large conglomerates) have used their clout as exporters and investors to resist further reform. Major foreign acquisitions in the financial sector by 2006 prompted a backlash against further market opening, although this remains desirable, especially in the service sector. In order for the economy to grow at a faster rate in the long-term, South Korea, despite its skilled workforce and large middle class, must develop a strong and diverse local economy instead of relying disproportionately on exports for growth, which benefit the chaebol and stifles domestic demand.
South Korean Economy in the Mid 2000s
In the mid 2000s South Korea was the world's seventh-largest exporter. It had rebuilt itself after the 1997-1998 Asian Financial Crisis to be an industrial powerhouse, expanding its domestic economy while becoming a key supplier for countries around the globe. At that time South Korea was a major global supplier of televisions, cell phones and important chipss and ranked first in global market share in products as diverse as refrigerator-freezers, hairpins, metronomes, headbands, inner tubes, oysters, benzene, ginseng, tinted glass, copper chains and rope-making machines. [Source: International Monetary Fund, Korea International Trade Assn., Data for 2006 and 2007 are estimates]
Globalization has helped transform South Korea into massive, export-driven economic powerhouse.Peter Pae wrote in the Los Angeles Times: South Korea “ makes a quarter of all cellphones and supplies more than 10 percent of the world's steel. Hyundai Motor Co., which has rapidly gained share in the hypercompetitive U.S. market, has grown to become the world's No. 7 automaker. In addition to producing 44 percent of the world's commercial ships, South Korea is the largest maker of computer memory chips and flat-panel liquid-crystal-display screens. South Korea ranks first in global market share for nearly 60 lesser-known products -- a diverse list that includes hairpins, inner tubes and ginseng. [Source: Peter Pae, Los Angeles Times, December 3, 2006]
“South Korea has risen from that humble station to become the third-largest economy in Asia, trailing only Japan and China, and the 10th-largest in the world, according to the International Monetary Fund. The average annual income now: $16,000. "It's really remarkable how important the South Korean economy has become," Richard J. Ellings, president of the National Bureau of Asian Research in Seattle, told the Los Angeles Times.
While Japan Stagnated the South Korean Economy Took Off
While Japan stagnated in the late 1990s and early 2000s, South Korea, which enacted bold reforms in the 1990s, grew. The dulled sense of emergency in Japan was called the Boiling Frog Phenomenon, a reference to the fact a frog does not jump out of a pot of hot water when water temperature is raised so gradually the frog's loses it's ability to react.
In the 2000s, Japanese companies found it hard to compete against lower-priced rivals from South Korea and China. Competition has become so fierce in the electronic industry — both between Japanese companies and against foreign rivals mostly in South Korea, China and Taiwan — in some cases engineers, technicians and workers were unable to take their usual summer holidays in 2010.
The usurping of Japanese dominance in the electronics industry by South Korean rivals was evidenced by critiques of products by Japanese companies at the International Electronics Show in Las Vegas in 2010 and the growing strength of South Korea electronic companies, namely Samsung, in the U.S. market place. In 2009 in the U.S., Samsung had an 80 percent share of LED televisions and a 75 percent share of the market for televisions that accessed the Internet.
South Korea Outpaces Japan in Chips and Electronics
In the late 2000s, Japanese global market share in chips — 28 percent — was about half of what it used to be and Japanese companies were being outperformed by American as well as South Korean, Taiwanese and even Chinese companies, In 2006 Intel and Samsung had a combined share of the market that was as large as Japan's 20 largest chipmakers.
Japanese chipmakers had a hard time competing with rivals from South Korea and Taiwan, who harnessed the kind of scale and investment needed to get ahead. Japanese companies also relied too much on the Japanese market for sales and didn't put enough money into updating factories. Japanese chipmakers lost money and had ro spin off their chip operations as separate companies that were too small to make the kind of advancements necessary to keep up with their overseas rivals.
DRAM makers, market share in sales (2010 July -September quarter): 1) Samsung, South Korea (40.4 percent); 2) Hynix Semiconductors, South Korea, (19.8 percent); 3) Elpida, Japan (16.1 percent); 4) Micron Technology, U.S. (12 percent); 5) Nanya Technology (4.2 percent); 6) Powerchip Technology, Taiwan (2.6 percent); 7) ProMOS Technologies, Taiwan (1.8 percent). [Source: DRAMeXchnage survey]
Hiroko Tabuchi wrote in the New York Times in May 2010, “Japan's electronics makers, like Sony and Panasonic, have been usurped on one end by rivals elsewhere in Asia, which have overtaken the Japanese by making cheaper versions of the products Japan long dominated. Samsung Electronics of South Korea now leads the global television market with an almost 25 percent share in flat-panel TVs, according to DisplaySearch. [Source: Hiroko Tabuchi, New York Times, May 29, 2010]
“Increasingly Japanese electronics firms are being out competed by South Korean firms. In 2010, a number of Japanese companies including Sony, Panasonic and Sharp, released 3-D televisions and other devices but some of their buzz was taken by South-Korea-based Samsung that introduced similar devices and cheaper prices. In 2009, Samsung made more in operating profit than Japan's nine electric companies combined. Some say South Korea's success is a product of its technological know-how combined with clever marketing and good sense of timing.
“Japanese and South Korean companies are not only facing off against each other in the United States and Europe there are also battling in developing countries such as Brazil and Vietnam and in the Middle East. Hitachi was outbid by a South Korea on firm in its bid to build a nuclear power plan in the United Arab Emirates. Jeeva Raj, director of a major retailer in Singapore, told the Yomiuri Shimbun, “South Korean firms are giving consumers better bang for their buck than their Japanese counterparts. Chinese brands, such as Haier and TCL are on their way up too." Nobuo Kurhashi of Mizuho Investors Securities told the Yomiuri Shimbun, “In terms of making products at low prices, the South Koreans and Chinese are way ahead are way ahead of Japan." In response Japan is making products with fewer functions and are focusing on lower prices.
South Korea Exports It Way to Success in the 2000s
According to the World Bank: During the 2000s, South Korea has experienced an exceptional export performance. Between 2001 and 2007 exports contributed to 68 percent of growth, which was less than for Taiwan (China) and Singapore, but more than in China, Japan, and Thailand. More interestingly, the country of less than 50 million people was among the top 10 world exporters in 2009, with exports valued at nearly US$50 billion in April 2011. Even in times of global economic turbulence, the performance of Korean exports in 2009 was the best in the region and its GDP growth the strongest among OECD economies. [Source: World Bank]
“The World Trade Organization estimates that between 2000 and 2009 Korea’s exports of goods and services grew at an average annual pace of 10 percent. In 2009 the ratio of exports to GDP was 51.8 percent, up from 28.8 percent in 1995. There was also a shift in structure of exports. Since the 1960s the country has moved from commodities and processed foods (75 percent of total exports in 1962), through manufactured goods (88.7 percent of total exports in 1985), toward emphasis on high-tech products since the 1990s (Dornbusch and Park 1987).
“Currently, Korea exports mostly semiconductors, wireless telecommunications equipment, motor vehicles, computers, steel, ships, and petrochemicals. Heavy industry products accounted for 90 percent of all exports. China, the European Union, and the United States are the main export markets for Korean enterprises. It is estimated that in 2009 exports to China accounted for 10.4 percent of Korean GDP (Ali and Dadush 2010). Korean exporters have been able to catch up to their Japanese counterparts, as Korean exports were 95 percent as varied as those of Japan.
Secrets Behind South Korea’s Export Success in the 2000s
According to the World Bank: “There are several factors that allowed Korean enterprises to be so successful in international markets. First, the Korean government has managed to keep its business environment friendly forexporters; in 2008 the country had the second lowest tax wedge (as a percent of total labor costs) among OECD countries. Korea ranked 16th in the World Bank’s Doing Business ranking in 2010. Keeping the nominal exchange rate low vis-à-vis its key trading partners has also fueled the expansion of exports. Well-priced labor and reasonable production costs made Korean companies relatively nimble, and the export mix changed to maintain competitiveness. Revealed Competitiveness Advantage (RCA) indices suggest, for example, that the Korean shipbuilding industry managed to remain exceptionally competitive. The RCA index also suggests favorable positions of Korean chemical, iron, steel, and electronics industries, but an increasingly less favorable situation for the textile industry. The ability to compete comes mainly from a strategy to produce a limited variety of goods but in higher quantities, thus at lower prices. High concentration of export products (the top 20 percent of product categories accounted for 95 percent of total product exports) allowed Korean entrepreneurs to obtain higher profits and invest in R&D. Large enterprises account for nearly 60 percent of total R&D expenditures. [Source: World Bank]
“Second, starting in the 1950s, at a time when a large part of the developing world was engaging in import substitution, the government actively encouraged exports. Sectors that focused on foreignmarkets were granted special finance and tax policies, including subsidizing transport costs as well as promoting infant industries. Exporters, mainly large, vertically integrated business groups (the so-called chaebol), were allowed to import inputs at world prices. From 1990 onward, the authorities supported the development of high-tech and next-generation industries. However,there is an inconclusive discussion in the literature on the extent to which activist industrial policy contributed to the growth of exports. Some argue that the role of government was crucial for the country. Others believe that additional factors (such as outward orientation and the role of theneighbors) were much more important than the industrial policy.
“Third, deepening regional integration contributed greatly to Korea’s success. Castley (1995), for example, points out the role Japan played in the development of Korean exports. By off-shoring their production to Korea, Japanese companies gave Korean companies access to international markets (such as the United States and European Economic Community) together with prospective clients. In 1972 nearly three-quarters of all Korean exports went to Japan and the United States,while 81 percent of imports to Korea came from those two countries. Having access to the most sophisticated markets in the world contributed greatly to the growth of exports. The country also took advantage of its proximity to other Asian markets by off-shoring parts of production to China or Vietnam.
“Fourth, Korea successfully diversified its portfolio of target markets. In 2009, 23 percent of total exports went to China, followed by the EU27 (12.8 percent), the United States (10.4 percent), and Japan (6.0 percent). Increasing economic ties with the biggest economy in the region and second biggest in the world proved to be beneficial, especially in times of global recession. In 2009 exports to China were responsible for 87 percent of the rise in Korea’s total exports, according to OECD (2010) estimates. Eichengreen et al. (2004) suggest that economic growth in China had a positive impact on exports in both middle-income Asian countries (such as Thailand and the Philippines) and high-income Asian countries (such as Japan and South Korea). Finally, in order to ensure greater access to important markets, South Korea joined a number of international associations (ASEAN, OECD) and entered several free trade agreements (FTAs), including those with Chile, Singapore, and India. According to the Ministry of Foreign Affairs and Trade, three new FTAs are in effect: with the European Union, the United States, and Peru. The country is also negotiating further agreements with New Zealand, Canada, Mexico, Australia, Colombia, Turkey and the Gulf Cooperation Council.
South Korea During 2008-2009 Global Financial Crisis
On South Korea’s condition during the 2008-2009 global financial crisis, Jamus Lim wrote in for World Bank” “Korea’s experience with the current global crisis has been somewhat less painful than the severe shock the economy went through in 1998, but it has nonetheless experienced significant spillover effects as a consequence of the crisis. Between August 2007 and November 2008, the won lost almost 50 percent of its value, before recovering a good share of its value with a 20 percent appreciation. Equity markets have followed a similar pattern, with the benchmark KOSPI 200 index falling to a low of 948 points in November 2008 (from 2,054 points a year before) before regaining to current levels at 1,684 points. Other financial sector indicators, such as interest rates and capital flows, have demonstrated signs of stress. Capital inflows, for example, fell sharply during the crisis, with portfolio and FDI contracting by 47 and 31 percent, respectively. [Source: “South Korea's Experience with the Financial Crisis of 07/09", Jamus Lim, World Bank, February 4, 2010]
“Korea’s real economy, however, has fared relatively better through this current episode, especially compared to the Asian crisis. To be certain, as an export-oriented open economy, it has experienced slowdowns along with the rest of the world. However, net exports remained remarkably robust through the crisis, and GDP has fallen markedly less than in 1997/98 (see figure). Likewise, investment has remained strong throughout most the period---it dipped slightly below 2 percent on a year-on-year basis for two quarters, and has since returned to positive territory---in contrast to the large declines in 1998. Importantly, Korea has also not faced balance of payments difficulties this time round that would necessitate IMF assistance.
“What is most remarkable is that the strong (relative) economic performance of Korea this time round has occurred in an environment of very weak global demand. Although the region underwent a severe recession during the Asian crisis, it was able to muster a V-shaped recovery, largely on the back of export recovery fueled by healthy demand in the developed world (mainly the United States). This time, with the epicenter of the crisis in the developed world, the ability of Korea to weather the storm has been admirable. Indeed, the Development Prospects Group's forecast for 2010 and 2011 has the East Asia and Pacific region leading global recovery with 8.1 and 8.2 percent growth rates, respectively, and Korea is expected to follow the region in exiting the global recession.
“Another thing that makes Korea's sidestepping of a crisis more amazing is the debt context in which all this has occurred. Corporate debt is at an elevated level (113 percent of GDP in 2008), which is comparable to levels prior to the Asian crisis. Bank lending to households reached about 40 percent of GDP. Together, these account for about 150 percent of GDP. The government fiscal balance, at KRW 33.0 trillion, is 3.2 percent of GDP for 2009, and expected to grow to KRW 49.8 trillion (4.7 percent of GDP). While the future is never certain, the significant compression on credit default swap spreads for major Korean financials and corporates (see figure) suggest that the storm has passed, at least for now.
“What enabled the Korea to weather the current crisis? Some would argue that Korea's reserve war chest has something to do with it. Indeed, recent research has shown that countries with larger reserve holdings have managed to maintain the strength of their currencies through the crisis, regardless of their current account balances or short-term debt levels. While the jury is still out on the specifics of the Korean case, a better understanding of the role of reserves in crisis mitigation will certainly be illuminative.”
South Korean Stimulus Measures During 2008-2009 Global Financial Crisis
South Korea initiated a 14 trillion won (US$10.8 billion) stimulus package to deal with the 2008-2009 global financial crisis MarketWatch reported: The Ministry of Finance expanded fiscal spending by around 11 trillion won in 2009 as part of the package. About 3 trillion was generated by tax cuts. It was hoped the fiscal pumping would help lift gross domestic product growth to around 4 percent in 2009, although officials cautioned the estimate could be revised downwards if global economic conditions deteriorate considerably. "Financial market uncertainties have been aggravated and are exerting a knock-on impact on the real economy," Finance Minister Kang Man-soo was cited by South Korea news agency Yonhap as telling reporters at a press conference Monday. South Korea's Composite Index, or Kospi, rose 2.7 percent to 1,142.57 in late morning trade after the stimulus was announced. [Source: MarketWatch, November 2, 2008]
About 90 percent of the new spending was sent to provincial and local governments for infrastructure and construction projects. About two-thirds of that spending took take place in the first half of 2009, reflecting government efforts to expedite the injection of cash into the economy in view of the impact of the global slowdown. South Korean officials considered a number of measures to boost the economy for several weeks. The announcement was released hours after data showed South Korean exports grew at their weakest pace in 13 months in October. The export downturn was partly caused by slowing shipments to China, which fell for the first time since 2002.
A few weeks earlier, South Korea announced a package worth over $130 billion to rescue its markets dragged down in the global financial crisis, offering a state guarantee on foreign debt and promising to recapitalize financial firms. Miyoung Kim and Yoo Choonsik of Reuters wrote: South Korea “has looked like one of the region's most vulnerable to the credit crunch with its banks struggling to find the dollars they need to pay debt and as frightened investors hammered down the won to its lowest in over a decade. The country's top three economic planners said that on top of the guarantees worth $100 billion, they would also inject $30 billion to banks and exporters and help smaller firms get some 12 trillion won ($9 billion) in loans. "The government has decided to join in global coordinated efforts to stabilize financial markets and we'll continue to provide pre-emptive, decisive and sufficient measures to this end," South Korea's Finance Minister Kang Man-soo told reporters. [Source: Miyoung Kim and Yoo Choonsik, Reuters, Oct 19, 2008]
“The past fortnight has seen a storm of market support measures from financial authorities around the globe ranging from interest rate cuts to bank nationalizations. "We believe providing the government guarantee on banks' foreign exchange dealings is the strongest step to save our foreign exchange reserves," Kang said.They also said they would announce this week a separate set of measures to help the local construction industry, among the hardest hit sectors as the global turmoil is seen pushing domestic economic growth to its slowest in over a decade. Analysts generally welcomed the measures, saying they should help soothe investors and boost local markets, adding they expected the central bank to trim interest rates as early as next month to stimulate sagging domestic demand.
2008-2009 Global Financial Crisis Scatters
In 2009, Time reported: “ During China’s boom years, the lure of Beijing was irresistible for tens of thousands of South Koreans. With trade and investment between China and South Korea soaring, businessmen flocked to the Chinese capital seeking their fortunes; students, eager to learn Chinese, flooded into local universities. They collected in areas like Wangjing, an upscale neighborhood in the city’s northeast, where some 80,000 Koreans settled. [Source: Time, April 2009]
Now, with the global economy mired in recession, they’re leaving. Business opportunities have dried up as China’s growth slows, while the plunging value of Korea’s currency, the won, has made it too expensive for many to stay. According to the Beijing-based Koreans in China Association, about a quarter of Wangjing’s South Koreans have departed since late 2008. In the Wudaokou area, a popular hangout for South Korean college kids, restaurants and karaoke parlors are suffering. The Xiangzhu Fang restaurant, which serves Korean-style barbecue, hosted a mere two couples one recent lunchtime. “Many Korean students are moving out and some are dropping out of school to go home,” says Kim Ji Youn, an undergraduate studying at Beijing’s Tsinghua University. “It is really a tough time for us.”
Trying to Save Jobs During the 2008-2009 Global Financial Crisis on Workers
Choe Sang-Hue wrote in the New York Times: “Around the world, global industrial giants like Sony and General Motors are shedding workers as the worldwide recession depresses demand for goods. But the biggest conglomerates in South Korea are trying something different: hiring new workers by the thousands. South Korea is not the only country trying to prevent major job losses by asking workers to reduce hours or take pay cuts, but it has turned job preservation into something of a national drive, with the government appealing to both unionized workers and management to set aside differences for the economy’s sake. Saving jobs, President Lee Myung-bak has said, is “our No. 1 goal.” [Source: Choe Sang-Hue, New York Times, April 1, 2009]
“In late February, the commission brought together industry groups, unions, civic and religious representatives and government to reach what was billed as a grand national deal to “share pains for social unity.” Although the agreement was not legally binding — and it remained to be seen whether this deal would save the economy or was merely delaying the pain — workers in major conglomerates have since accepted wage freezes. Unions have promised not to strike. Executives have cut their own wages, and those of new recruits, by as much as 30 percent, with a promise to use the cost savings to hire young job-seekers. “This is an excellent time to find good talent,” said Kang Duk-soo, chairman of the shipping and shipbuilding group STX, referring to the fast-rising unemployment rate among college graduates. At Mr. Kang’s conglomerate, executives agreed to cut their salaries by 10 percent to 20 percent in return for no layoffs, no strikes and the hiring of 1,500 new workers.
“Mr. Lee has chastised bankers for hanging on to their high salaries while asking for taxpayers’ money to ease their cash crunch. Last week, executives at KB and Shinhan, the nation’s two largest financial groups, returned their stock options in a “voluntary action to share pains and responsibility for the economic crisis.”
“For its part, the government will spend 4.9 trillion won, or $3.5 billion, to create 550,000 jobs. Schools will hire more temporary teachers. The government will give tax breaks and pay part of the wages when small companies send workers on vacation instead of firing them, or hire temporary workers. Government officials and military officers have volunteered to return as much as 10 percent of their pay and donate it to create jobs for the needy.
“Discontent is already brewing in South Korea, despite the calls for unity. One of the largest labor groups in the country, the Confederation of Korean Trade Unions, refused to join the government-led job-sharing deal. It dismissed the program as a “stopgap trick” and a waste of taxpayers’ money. It also criticized the effort as doing little to create meaningful jobs but helping big businesses by cutting wages, mostly for new workers who have no power to negotiate with management. “Even if I am jobless and desperate, I don’t like this idea of hiring more people at lower wages,” said Lee Dong-chan, 31, a former garment wholesaler who is now enrolled in a government-financed training program for the unemployed. “It hurts only the poorest of workers. “Even if I get a job this way, I’ll only work for a few months,” Mr. Lee said, “and during that time I’ll always feel like a pathetic extra who exists at the generosity of other workers.”
South Korean Response to 2008-2009 Global Financial Crisis Built on Lessons Learned After 1997-1998 Asian Financial Crisis
South Korea’s approach to the 2008-2009 global financial crisis contrasts sharply with how it dealt with the 1997-1998 Asian Financial Crisis. Choe Sang-Hue wrote in the New York Times: “Appeals to the communal spirit come naturally in this resource-poor country, where “save the economy” becomes a national mantra in times of crisis. During the 1997-98 Asian economic crisis, South Koreans lined up at banks to turn in their families’ gold trinkets so that the government could melt them down into ingots and raise badly needed foreign currency. “If our focus in 1998 was restructuring ourselves, our emphasis now is on sharing pain and jobs, because this crisis is not of our own making and comes from the outside,” said Mr. Choi of the economic commission. “Our approach will help promote the love-your-company mentality.”[Source: Choe Sang-Hue, New York Times, April 1, 2009]
“The biggest challenge facing South Korea now is not to restructure its companies, as is the case in the United States, but to revive consumer spending — a problem that would worsen if companies fired workers, said Yi Jong-goo, standing commissioner of Financial Services Commission, the government’s chief financial regulator. Jobless South Koreans have traditionally relied on personal savings and support from their families. The country’s social safety net remains grossly inadequate to absorb a sudden increase in unemployment, another factor that raised alarms when the country’s jobless rate climbed to 3.9 percent in February, from 3.5 percent a year earlier.
“But some economists warn that the government’s recipe for sharing the pain may only prolong it. Most jobs it hopes to create are for temporary workers whose contracts will expire by the end of this year. The danger is that if the economy does not rebound by then, South Korea will have already spent 39 trillion won, equal to 4 percent of its gross national product, in a stimulus package that risks ballooning the national debt by 19 percent to 367 trillion won. That debt would be equivalent to 38.5 percent of the G.D.P.
“Big South Korean companies have room to hold off on layoffs because they underwent restructuring a decade ago, and the weakness of the won is helping exports. But Nam Yong, vice chairman of LG Electronics, recently said that he feared what would happen if the won started climbing again, especially against the Japanese yen. LG Group is hiring 6,000 workers this year, the most among South Korean companies.
“South Korea hopes that the United States and other governments, especially those in Europe, agree to adopt coordinated economic stimulus actions to spur the global economy to a rebound. Without the recovery of global markets, any stimulus to South Korea’s export-driven economy might fizzle. “The world must move together,” said Noh Dae-lae, an assistant deputy minister of strategy and economy. “If the crisis goes on, our job-sharing program can burden us.”
Relying on Exports During the 2008-2009 Global Financial Crisis
According to the World Bank: ““During the recent economic crisis and decline in global demand for high-tech products. Korean exports fell by 15.4 percent in May 2009 compared to May 2008. Yet relative to other countries in the region, the drop in exports was relatively small and the rebound quick. Among OECD countries, in 2009 Korea was the leader of the recovery, with the highest real GDP growth (6.1 percent) and the second highest real export growth (10 percent), after Iceland (10.5 percent). Good trade performance fueled the recovery, partly due to the growth of Asian economies, mainly China. There were also other important contributors to growing exports: a relatively weak won, a sizeable fiscal stimulus, and good policy coordination in the OECD group. Thus, the consequences of the current global slowdown were less severe in Korea than those of the Asian crisis of 1997. [Source: World Bank]
“Although Korean exporters have successfully tackled the crisis, there are several challenges ahead. The IMF (2010), for example, argues that Korea could balance manufacturing and services better, thus making its economic growth less volatile. By decreasing the government’s support for export-oriented industries, the country could move from export-oriented sectors toward nontradables. Second, the competitive pressure from China is here to stay. Third, Korean population is aging, households remain highly indebted, and deteriorating terms of trade, though favorable to exports, limit income growth as well as domestic consumption. Double-digit growth rates of spending on health care can be offset only with higher productivity, raising labor force participation, and/or immigration.
South Korean Economy Grows 6.2 Percent in 2010 — Most in Eight Years
South Korea’s economy grew 6.2 percent in 2010, its fastest expansion for eight years, the central bank said. Growth was only 0.3 percent in 2009, during the 2008-2009 global financial crisis. “The growth of the Korean economy accelerated last year, helped by a sharp upturn in facilities investment, expanded exports and a pickup of growth in private consumption,” the Bank of Korea said. [Source: AFP, 31 March 2011]
AFP reported: The contribution of domestic demand to overall growth rose sharply in 2010, “pointing to self-sustaining recovery in the private sector”, said Kim Young-Bae, director general of its economic statistics division. In the fourth quarter last year the economy expanded 0.5 percent from three months earlier, in line with the earlier estimate. Compared with a year earlier, it grew 4.7 percent in the final quarter -- less than a previous estimate of 4.8 percent.
The growth in 2009 was the largest since 7.2 percent in 2002. The bank expects growth to slow in 2011 but stuck by its December forecast of 4.5 percent. “The economy -- which grew quickly last year because of a low base of comparison in the previous year -- will slow this year,” Kim said. “But the outlook we gave last December largely remains unchanged. Growth won’t get any worse than we thought.”Moody’s Analytics agreed expansion remains on track, fuelled by robust exports and buoyant household spending. “Employment has been rising strongly, and the rising participation rate suggests that many who sat out the recession are re-entering the labour force,” said senior economist Matt Robinson in a commentary. Robinson cautioned that Japan’s disaster could dampen its neighbour’s growth in the first two quarters, with South Korean experts crimped and shortages ofimported Japanese components. But Korean electronics, autos and heavy industry manufacturers may win increased market share amid unmet global demand for Japanese products.
Image Sources: Wikimedia Commons.
Text Sources: South Korean government websites, Korea Tourism Organization, Cultural Heritage Administration, Republic of Korea, UNESCO, Wikipedia, Library of Congress, CIA World Factbook, World Bank, Lonely Planet guides, New York Times, Washington Post, Los Angeles Times, National Geographic, Smithsonian magazine, The New Yorker, “Culture and Customs of Korea” by Donald N. Clark, Chunghee Sarah Soh in “Countries and Their Cultures”, “Columbia Encyclopedia”, Korea Times, Korea Herald, The Hankyoreh, JoongAng Daily, Radio Free Asia, Bloomberg, Reuters, Associated Press, BBC, AFP, The Atlantic, The Guardian, Yomiuri Shimbun and various books and other publications.
Updated in July 2021