Unwelcoming trend: current account surplus of Korea

This April, Korea’s current account surplus recorded 8.14 billion U.S. dollars, continuing the series of surplus for 38 months in a row since March in 2012. Considering Korea’s economic structure, which is heavily dependent on international trade and sensitive to overseas variables, current account surplus is a welcoming news. However, it leaves bitter taste as this is the “surplus stemming from recession” in which export decreases along with imports, unlike “the surplus resulting from an economic boom” between June 1986 and July 1989.

Although Korea’s export amount in April dropped by 11.2 percent compared to the previous year, decrease rate of imports (17.9%) was bigger than that of exports. This is the reason why Korea recorded surplus in the current account balance, which means our economy is shrinking. It is similar to Japan’s surplus caused by economic downturn and rapid emergence of low prices in early 1990s, which came right before Japan entered a long-term recession so called ‘lost 20 years.’ Concerns are growing over the trend since it may create a vicious cycle of recession.

Even though the real economy has slowed down, growing influx of foreign currency such as US dollar due to the current account surplus pushes up the value of Korea won, increasing the burden to our economy. As Korean won’s value is surging, domestic companies’ price competitiveness is falling down in the global export market. Japanese companies, our major competitors, are rapidly increasing export volume taking advantage of weak yen, the representative policy of ‘Abenomics.’ Amid rapid chase by latecomers such as China, Korea fails to go ahead, ending up with the same major export items over the past 10 years. Korea’s export volume has been decreasing for five months in a row between January and May, which is a sign that must be taken seriously.

To reduce current account surplus and reduce the pressure to push up Korean won’s value, the government plans to announce measures to vitalize overseas investment during this month, which includes support for individuals’ investment in foreign stock markets, domestic companies’ M&A of foreign companies, and overseas investment of pension and funds. It is necessary to reduce side effects of excessive dollars, but it is still doubtful whether such countermeasures can remove the shadow of recession-led surplus caused by ‘shrinking economy.’

What Korea desperately needs is a virtuous cycle of “growing economy,” in which the government gets rid of regulations to help companies invest in Korea, fruits of such investment go to the public, leading to revival of domestic consumption. In some part, it can be attributed to the opposition party which is dragging its feet to process bills for excessive regulation elimination in the National Assembly. But a bigger problem lies in the government which does not roll up its sleeves for what it can do directly, such as eradication of regulations in the metropolitan area.