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Goldman Sachs warns Korea against possible Dutch disease

Goldman Sachs warns Korea against possible Dutch disease

Posted July. 25, 2015 07:10,   


Goldman Sachs has warned Korea against a possibility of the Dutch Disease. According to the global investment bank, rising value of the Korean won due to increasing current surplus is now pushing downward profitability of the manufacturing industry in Korea.

Goldman Sachs analyzed in its recent report that the profitability of the Korean manufacturing businesses and export volume decreases together as Korea’s growing trade surplus driven by falling oil prices strengthens Korean won, according to Korea Center for International Finance on Friday.

"Dutch Disease" is a term to describe the phenomenon that the Netherlands experienced in the late 1950s, in which the stagnation in domestic manufacturing resulted from the rise in the value of the country`s currency when large deposits of natural gas was found. Although Korea is a natural resource importing country, Korea is suffering similar symptoms to those of the Netherlands, which trade surplus increases and the value of Korean won is rising due to the recent drop in oil prices. The report stressed that the Bank of Korea’s tendency to maintain low interest rates and the government’s policies to attract foreign investment can contribute to prevent the Dutch disease.

As many domestic companies are moving out their manufacturing bases to other nations due to lower labor profitability compared to labor costs, the link between improvement of profitability in manufacturing and increase of labor costs is being weakened, said Standard Chartered in its report. The U.K.-based global bank pointed out that allocation of the supplementary budget may work favorable to the economy but a temporary injection of capital may not resolve the structural issues of low profitability in manufacturing and sluggish exports.