Tuesday, March 31, 2020
Where Is It Headed?
The Korean economy and society is in danger of collapse though it is seemingly thriving
Where Is It Headed?
  • By matthew
  • March 9, 2012, 14:11
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The phenomena of social polarization and jobless growth are casting dark clouds over the present and future for Koreans. The government has failed to come up with a national vision and the country is now more likely to follow the way of Japan, mired with a low birth rate and aging population, bubbly real estate market, gaping income divide, and soaring household debts, etc.

Nowadays, Korea is increasing its international standing with success. However, the lives of Korean people are getting harsher. The country is rolling in money but individual Koreans are digging deeper in their pockets.

Korea is the only nation in the world to attain democratization and industrialization at the same time so successfully since the end of WWII. It overcame a tragic civil war and iron-fisted military junta in order to achieve a peaceful regime change not once but twice, and beat the recent global financial crisis ahead of everyone else. It hosted the G20 Summit in 2010, signed an FTA deal with the United States, and exported nuclear power plants to the United Arab Emirates.

Economic indices are adding to the optimism. The trade balance has been in the black since February 2010, while in December 2011, its cumulative trade volume surpassed one trillion dollars. Economists are forecasting that the country is likely to catch up with France, Britain and Italy within three years to become the world’s fifth largest trading nation. With exports skyrocketing, Korea’s foreign exchange reserves broke the US$300 billion mark in April 2011.

Korea is also scheduled to host the Winter Olympics in 2018. It will then become one of the few nations to have hosted all four major sports events; the FIFA World Cup, IAAF World Athletics Championships and the Winter and Summer Olympic Games. The IMF, which provided a bailout loan to Korea back in 1997, also acknowledged the nation’s ability to host to international games. It would appear that the country is alive and kicking in many aspects.

75% of Middle Class Population on Verge of Disappearing

Here is a question: Are people adequately sharing these accomplishments? It seems that only a few Koreans are willing to say yes. The majority of salaried workers have already given up on the dream of buying a home by saving up.

As recently as the early 1990s, when per capita GDP was only a third of the current figure, ordinary wage workers took it for granted they would become a home owner after a certain period of saving. At that time, approximately 75% of all Koreans believed they were Middle Class. “During a five-year period beginning 1988, the average wage rose some 105%, while GDP increased 125%, and this was at a time of the fairest income distribution in Korea,” said Kim Jong-in, who was the senior presidential secretary for economic affairs between 1990 and 1992.

Now, the issue of just distribution is on the brink of collapse. According to the Korea Institute for New Society (KINS) vice president Kim Byung-kwon, the Korean society is polarized into enterprises Vs. laborers, large corporations Vs. small-scale businesses, and the wealthy Vs. the poor, with the gap getting wider and wider. One of the natural results of this is the accelerating disappearance of the Middle Class. Major companies are reporting record profits, yet most people never have enough money and their purchasing power continues to decline.

The future is bleak for young people in particular. In not a few cases, a young person’s job is determined from the get-go by his or her father. College students, who have undergone years of suffocating competition, are forced to spend more of their time working part-time jobs than their intellectual quests because they have to pay hefty tuition fees. Awaiting them after graduation is a state of unemployment caused by jobless growth. The fact that the GDP per capita is over US$20,000 does not have any meaning for them since they are finding their future much gloomier than when it was just US$6,000 or so.

The myth that economic growth is supposed to result in a happier life and higher standard of living has long been smashed. The good old days never seem to return. The suicide rate in Korea is the highest among OECD member countries, while the birth rate is at the other end of the spectrum. There is a prediction that the population of Korea will decrease by no less than 11 million by 2100.

While conglomerates are enjoying all-time high exports, the real purchasing power of individuals showed a 0.6% fall and entered negative territory a year ago. An increasing number of people are seething, with the market-friendly, weak won policy of the government only benefitting major corporations.

Rich Nation, Poor People

Poor people in a wealthy nation -- This was the case in Japan. It is on this basis that experts are worried that Korea may reiterate its 20-year depression. In his book published in 1978, Former Japanese Prime Minister, Nakasone Yasuhiro, described his own nation immediately before it reached US$20,000 GDP per capita and asked the following questions: What is gushing at this moment in the minds of Japanese? Aren’t they feeling that they are stuck in a deadlock? Are they really feeling they are better-off than before the Yen’s appreciation? What does the future have in store for them? What if the Japanese economy goes under in the upcoming aging society?

These are the very doubts that are haunting Koreans these days. All of the serious problems mentioned in the book are now appearing in Korea, i.e., weakening growth momentum due to low fertility and an aging society, real estate bubbles, deteriorating sovereign debt conditions, savings rate heading to zero, and widening income gap, etc. What is worse, the rapidly progressing divide between large and small-sized companies, urban and rural regions and export-driven and domestic enterprises is recurring here, too.

Japan slipped into long-term recession back in 1991, when the real estate bubble burst. The lack of leadership in the political circle and government added fuel to the downward economic spiral. The executive branch intended to handle deflation through fiscal expansion and consumption stimulation, yet only served to increase national debt.

Exactly the same thing is happening across the Korea Strait now. With common people feeling the pinch more than ever amid the income divide, pressure is building up across society for state-funded, cheaper higher education, free lunches for kids, and so on. The ruling and opposition parties, ahead of general and Presidential elections, are inclined to be receptive to the voices of voters. The President, meanwhile, is a lame duck in his fourth year in office, and is failing to coordinate the situation.

Diversification of Growth Engines Urgently Needed

Japan slid into stagnation when it was the world’s second-largest economic powerhouse. Though in the middle of a long-lasting recession, it still remains a mainstay of the global economy with its advanced technological strength and overwhelming capital power. Korea, however, is facing all of its troubles as the tenth-largest economy.

Korea is in no condition to be smug about its forte, either. Leading exporters such as Samsung Electronics, LG Electronics and Hyundai Motor Company are being closely followed by their competitors in BRICs nations. Even a single misstep could drive the country to a point of no return, and crippling its growth potential. “Korea has generated profits by means of exports, but too much dependence on this has the danger of making the entire economy vulnerable to even a minor impact,” commented Subir Lall, the IMF's mission chief for Korea.

An economic warning signal is already flashing. Total household liabilities are over 800 trillion won, while public agency debt amounts to 216 trillion won. The latter has doubled since the inception of the incumbent administration. “Government debt is another obstacle to stable economic management, as is seen in the portion of sovereign debt to GDP running to 33.9% as of the end of 2010,” said professor Shin Jang-sup from the National University of Singapore.

Until recently, the government finance side was quite solid. During the 1997-1998 Asian Financial Crisis, the government raised public funds and disposed of distressed corporate assets with ease based on its strong financial background. In 2008, it expanded fiscal spending successfully to help companies and job seekers. What the professor is concerned about is that now things are different.

“Judging from the speed of sovereign debt growth, we cannot say the Lee Myung-bak Administration is fully prepared for a possible near-future crisis. The historically high-level of household debt will demand fiscal outlays in the end and populist policies may cause some waste of resources with the elections approaching. We need to take note of the case of Greece, for which fiscal deterioration led to a financial catastrophe. There is no guarantee that Korea won’t follow in the European nation’s footsteps.”

Community-oriented Values and Social Balancers Nowhere to Be Found

Korean society these days, where a community-oriented mindset is rapidly vanishing, reminds one of a mere group of individuals controlled by an every man-for-himself mentality. For instance, even when someone is being battered on a subway train or bus, others just turn a blind eye. The virtue of kind consideration is put aside as the society becomes like a jungle, where only the strong survive. Nonetheless, nothing is assured for the survivors. Politicians, the ones to mediate the conflict by lending their ears to those they represent, are buried in the desire for power, busy arguing among themselves all the time.

That is why the populism issue is rearing its head again. Populism emerges to calm the discontent of the masses when wealth and power are concentrated in the hands of a few. It is somewhat inevitable in today’s Korea considering the growing trend of social polarization. The problem is that the ruling and opposition parties have never put their heads together to deal with it. They just insist on their stances. Recently, President Lee Myung-bak advised them not to be indulged in the pursuit of populist policies such as tuition cuts and free lunches. “We are just listening to the people to give them what they need. What we are trying to do has nothing to do with populism,” Democratic Party leader Son Hak-gyu retorted. The parties have covered their ears to each other regarding a matter that could shake the nation’s financial soundness to the ground.

The problem is not limited to welfare policy. So prevalent is the lack of authority to arbitrate conflicting interests, there is no agent or buffer speaking for common values and interests. If the current state continues, no desirable response will be available in the future when issues directly related to the prosperity of the nation, e.g., South Korea’s relations with North Korea and Northeast Asian countries, come to the fore. If nothing changes, the oneness of the nation will be lost, along with its initiative regarding critical international issues on its own peninsula. The tipping point is near. A prosperous Korea is becoming a thing of the past.