Link Between Exportation and Domestic Demands Cut Off

While exportation is showing a favorable turn, domestic businesses such as consumption and facility investment, on the other hand, are still frozen and showing no signs of recovery. From this matter, it has been shown that the “exportation-domestic business polarization” has gone to an extreme level. If investment and employment does not show an increase and if this matter becomes prolonged, it has been analyzed that the growth potential of the Korean economy may possibly take a damaging blow.

Exportation-domestic business polarization deepens: According to the “Trend of Industrial Activity During October” report that the National Statistics Office announced yesterday, owing to the improvement of exportation, production has increased 7.4 percent compared to last October. The cyclical component, which is the coincident index showing the current economic situation, rose by 1.0 point since last month to a 100.2.

Shipment for exports during October rose 17.8 percent compared to last October, showing a two-digit rise for five months in a row since June.

However, domestic demands are still in midwinter form. Wholesale and retail marketing, which is a representative consumption index, fell by 1.7 percent from last month, falling downhill for the eighth straight month.

Sales at department stores have decreased 15 percent comparatively to last October and is the highest figure since the 20.8 percent decrease in November 1998. Even with its powerful discount events, the sales at large discount stores increased by just 2.7 percent compared to last winter.

Regardless of the improvement in exportation, facility investment decreased 3.8 percent, showing a negative for four consecutive months. Facility investment has decreased every month except in March (0.1 percent) and June (2.7 percent).

Since the factories have been operating without facility investments, the factory operation rate centering on export industries has risen considerably. The operation rate during October was 81.1 percent, 2.3 percent higher than November’s rate, and the highest figure in six years and six months since April 1997 (81.5 percent).

Connection between exportation and domestic demands cut off: Samsung Economic Research Institute Chief Economist Hong Sun-young analyzed, “This improvement in exportation has not positively affected domestic demand for such a long time which is a very strange occurrence. It seems that the connection between the exportation and domestic demands has been cut off.”

It is explained that the “exportation improvement→investment increase→employment environment improvement→income increase→activation of consumption→domestic demand business improvement” structure, which is the general positive cycle structure, has not been functioning lately in the Korean economy.

It has been pointed out that the major cause of this matter of exportation and domestic demands functioning independently is that enterprises are shirking investment. The unstable political situation and matters within and outside the economy are not providing the conditions to invest at ease. It has also been pointed out that the increasing household budget loans and people with bad credit ratings are also causes for the slump in domestic demands.

The Ministry of Finance and Economy authority said, “It concerns us that exportation improvements without the increase in investments and consumption will not increase employment, and will eventually eat up the growth potential of Korea’s economy. The key is for businesses to recover their investment minds.”

Kwang-Hyun Kim kkh@donga.com