[Analysis] Where Is the Korean Economy Headed?

Korea has achieved unprecedented and rapid economic growth since the 1970s thanks to the huge global demand for high-quality and affordable products made in Korea.

The economic boom in advanced economies that are major consumers of Korean products played an important role in pulling the Korean economy out of the Asian financial crisis ten years ago.

Over the past ten years, the global economy thrived on the back of the “global imbalance,” which allowed emerging Asian economies to accumulate hefty foreign reserves from active consumption in advanced economies. Emerging economies then began to make heavy investments in their rich rivals with their newly found wealth.

Economists for years had warned that such an imbalance in global capitalism, or “the fearful balance” in their own words, was no longer sustainable. The U.S.-triggered financial crisis finally broke down the imbalance, which resulted in the erosion of consumer power in advanced economies. The Korean economy, heavily dependent on exports, was also affected by the collapse of the global imbalance.

To make matters worse, major export markets are unlikely to pick up their spending habits soon after the crisis is over. Unless Korea rethinks its growth equation, many experts say the Korean economy will see its potential growth rate slip from the four-percent range to between three and two percent, let alone maintain its growth rate prior to the crisis.

○ End of the global imbalance?

The global trade imbalance peaked at the beginning of the century.

Many Americans spent more than they could afford by taking out loans. Asian countries saw their trade surplus soar thanks to rising exports to the U.S. market. As a result, America’s current account deficit snowballed from 215 billion dollars in 1998 to 788.1 billion dollars in 2006.

“The global economy was in good shape up until 2006 thanks to such imbalance,” said Park Hyun-soo, chief economist at Samsung Economic Research Institute. “U.S. consumption was active during the housing bubble period, while rising exports from Asian countries including Korea enabled the economic boom.”

The precarious balance began to crumble with the subprime mortgage crisis in 2007. The financial crisis developed into a full-fledged catastrophe in September last year, instantly changing the consumption dynamics of advanced economies including not only the United States, but also Japan and Europe.

In other words, more consumers closed their wallets and began saving. Last year, the average savings of an American in the fourth quarter last year shot up to 2.9 percent from under one percent a year before.

Asian countries that failed to foresee the recent crisis made massive equipment investment over the boom to raise output capabilities. As a result, they face unprecedented oversupply. For example, major Japanese exporters including Toyota Motor and Sony suffered heavy deficits. China’s exports last month are also expected to post growth of minus 20 percent year-on-year.

“Over the past several decades, Japan was constantly advised to reduce its export dependence on the U.S. and Europe and boost its domestic demand, all in vain,” the Wall Street Journal said, calling Japan’s crisis the collapse of the export bubble.

The Korea Institute for International Economic Policy (KIEP) warned in a recent report, “In the worst-case scenario, the collapse of the global imbalance could trigger a vicious cycle of the heavy decline of the dollar, a U.S. economic slump, sharp rise in U.S. long-term interest rates, and the demise of Asian economies.”

○ Export reliance triggers “jobless growth”

A strong domestic market can prop up a economy in the face of the unprecedented economic crisis. Unfortunately, Korea’s export-reliant economy has no solid domestic demand to back it up, and will be hit hard by reduced consumption of advanced economies. Though Korea’s exports to the U.S. market accounts for less than 20 percent of the country’s exports, much of the shipments head to the United States through a third country such as China. Therefore, Korea can still feel indirect effects.

Export industries largely developed by state-led initiatives from the 1960s spearheaded Korea’s economic growth. Exports experienced a temporary setback in the oil shocks and the Asian financial crisis, but always served as the momentum for overcoming difficulty after the crises subsided. Nonetheless, Korea is under criticism for focusing on quantitative trade expansion in the global economic boom instead of renewing its industrial structure in preparation for changes later on.

Korea’s excessive dependence on exports could be one factor behind the phenomenon of jobless growth.

The Bank of Korea said the number of jobs generated by every billion won (700,000 dollars) of exports fell from 26.2 in 1995 to 16.6 in 2000 and 12.7 in 2003. As exports shifted from labor- to technology-intensive industries, job creation markedly declined. Without a solid domestic economy, it will be difficult to generate jobs simply by expanding exports.

“An industrial structure with high export dependence means it is inevitably vulnerable to changes in external factors,” said Song Byung-joon, chief researcher at the Korea Institute for Industrial Economics and Trade.

“The Korean economy must gradually shift the focus of its excessive export-dependent industrial structure by fostering more service industries such as education, health, medicine and entertainment.”

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