SOUTH KOREAN ECONOMY

by Jaeyeon Hwang

image from: http://www.freeppt.net/background/korean-flag-backgrounds-for-powerpoint.jpg

Overview• 15th largest economy (nomial GDP), 12th largest

(PPP) economy in the world as of 2010

• One of the four ‘Asian Tigers’ (countries that maintained high growth rate of approx. 7% annually since the 1960’s due to exports and industrialization)

• 7th largest exporter, 10th largest importer (http://www.economywatch.com/world_economy/south-korea/export-import.html)

• largest economic sector - service sector making up 57.6% of the economy as of 2008. (Agriculture: 3% and manufacture: 39.4%)

• leader in IT sector (leading companies, Samsung and LG receives subsidies from the government)

Economic Growth

• stable, continuing growth

• Especially stable during 2003~2007: 4~5% annual growth

• downfall in 2008~2009 during the “late-2000s recession”

• however, strong recovery in late 2009

South Korean GDP based on PPP

Economic Growth

• Korean Economy was very stable during 2003~2007 marking 4~5% annual growth

• During the ‘Great Recession’ in 2008, South Korean Economy faced a downturn, however was able to prevent recession, or negative outward gap; GDP growth rate decreased by 5.1% compared to the previous quarter.

• GDP growth halted during 2008-2009, however recovered in the 3rd quarter of 2009

Economic Growth• Korean government is more Keynesinist; Korean government

and business is closely tied (e.g. directed credit and import restrictions)

• 7th largest exporter, 10th largest importer (http://www.economywatch.com)

• After the Asian financial crisis in 1997-98, economic reforms were made - Korea got more open to foreign investment & import.

• Government promoted the import of raw materials and technology instead of consumer goods. Korea’s factors of production is not as strong as other countries - hence its growth was based mostly on importing raw materials and technology, then manufacturing and exporting goods made from the raw materials (e.g. cellphones, electronics). Growth is based on injections (export).

• Encouraged savings & investment over consumption. (Decrease expenditure)

• During the “late-2000 recession” Korea’s economy faced a downturn, however was able to avoid recession and recovered in 3rd quarter due to export growth, low interest rates and expansionary fiscal policy = over 6% growth in 2010

• Boosted injection in order to prevent recession (export growth, low interest rates (cost of borrowing money decreases, more people will take a loan for consumption or for investment - there is less risk of investment by taking a loan, since the interest rate is low), and fiscal policy (increase in government expenditures/decrease in taxes in order to decrease the government’s budget deficit or increase the budget surplus).

Unemployment

•Average Unemployment rate: 3.75%•As of 2011, 28th lowest unemployment rate out of 200 countries.•In 2002~2008, the growth of Korean economy was stable - hence the unemployment rate stayed relatively low. •2009~2010, Korean economy faced a temporary downturn - the unemployment rate gradually increased, and hit 4.8% in early 2010. •January 2010: Government spent money on public investment and subsidies(to companies, households, local gov.) and boosted the economy; this created approx. 200,000 new jobs; unemployment rate fell. •However, eurozone crisis and high costs of oil/raw materials are affecting the Korean economy negatively, since Korea’s economy is highly based on exports - Unemployment rate is rising again.

Inflation

from http://www.global-rates.com/economic-indicators/inflation/consumer-prices/cpi/south-korea.aspx

•Government was able to maintain a low, targeted inflation rate in 2006~2008, despite the high oil prices and unstable foreign exchange rate.•3.3% inflation rate in 2006~2008.•Mid-2008 inflation rate soared along with oil prices. (Cost of production rose)•As world’s 10th largest importer, and 5th largest importer of oil - rising oil prices and weak WON in 2008-2009 made it difficult to import many goods, hence soared the inflation rate. •Again, inflation rate increased in 2011 due to high oil/raw materials prices.•Interest rates had to stay high - bank raised the rate 3 times in 2011 to ease inflation rate. •Eurozone crisis - reducing export demand•Inflation has fallen again in 2012 - in February the “inflation rate fell to 14 month low”

Balance of Payments• Korea is the world’s 7th largest exporter, and the 10th largest

importer

• Korea had constant balance of payments surplus in the early-mid 2000. Korea imported large amount of raw materials and technology, and manufactured goods and exported them for profit.

• 2001: $13.4 billion surplus (export: $151.4 billion, $138 billion)

• 2002: $12.6 billion surplus (export: $159.2 billion, import: $146.6 billion)

• In 2008, following the global recession, Korea’s balance of payments deficit was $56.4 billion, which was the largest deficit Korea had in the past 10 years. The high prices of raw materials, esp. oil and weak Korean Won lead to this high BoP deficit - this was followed by a downturn of Korean economy in 2008.

• In Jan 2009, as Korea’s economy started to recover, Korea’s balance of payments surplus marked the biggest monthly surplus of $4.5 billion, since May 2007.

• Jan 2012: $2.2 billion surplus, despite the BoP deficit in the previous month - due to rise in demand for Korean manufactured goods, which increased the export by 22.7%

Currently:

Difficult for Korea to increase BoP surplus :(

-High prices of raw materials (esp. oil) and weak WON is making it difficult for Korea to import goods cheaply (hence increasing import cost)

-Moreover the eurozone crisis is a threat to Korea’s exports - EU is Korea’s 2nd largest trade partner, however in 2011 (following the eurozone crisis, which is still ongoing) Korea’s export to EU fell by approx. 20%.

If Korea’s export decreases as well, it is likely to result in BoP deficit.

Images from: http://www.inkytea.com/crystalboy/files/2011/08/samsung-logo.jpghttp://blogs-images.forbes.com/elizabethwoyke/files/2012/01/LG-L

OGO.jpg

Equality of Income• In 2000s, along with the

expansion of the Korean economy, middle class grew - following the growth of middle class, the income equality has become ‘more equal’ compared to 1990-2000.

• Now upper class is rapidly growing, and decreasing the ‘equality of income’. The Gini Index (top 10%/bottom 10%) has been increasing, which suggests the equality of income has become less equal, as you can see from table 1.

• However, compared to 1990-2000, Korea’s equality of income has become more equal. (refer to graph 1)

graph from: http://www.google.co.jp/imgres?um=1&hl=ja&biw=1002&bih=621&tbm=isch&tbnid=_fwuc5l_TssFOM:&imgrefurl=http://www.oxfamblogs.org/fp2p/%3Fp%3D8352&docid=FufXLZiFy8eTiM&imgurl=http://www.oxfamblogs.org/fp2p/wp-content/uploads/G20-inequality-

http://www.oecd.org/dataoecd/44/52/37962502.pdf

Ratio of average income of the top 10% and bottom

10% 2001

Ratio of average income of the top 10% and bottom

10% 2006

Ratio of average income of the top 10% and bottom

10% Now

4.8 5.4 7.8

Table 1

graph 1

Annual Gov. Budgets

South Korean annual government budget is in a relatively fine shape - over the past 10 years, Korea has never had a budget deficit until 2010. •Korea follows principle of “spending within budget” (http://www.adbi.org)•2009 - Global Financial Crisis. GDP growth rate decreased. Government expenditure increased, but tax revenues remained almost equivalent to 2008. Like many other countries deficit in 2009.•4.1% Government Deficit in 2010 - approximately 70% of annual national budget was used to get Korea out of global financial downturn for the first half of 2010.•Planning to cut government deficit this year, in order to increase government budget.

Government Debt

•Increasing government debt due to:•aging population (increase in health/pension expenditure), and low birth rate•increase in issuance of government bonds (to fund the ‘large scale supplementary budget’)

•National Debt - nearly doubled over the past 7 years•Historically high debt of 32.56% (of the total GDP) in December 2009•Government debt was high during the end of 2009~2010, since the government had to recover the Korean economy from a temporary downfall and prevent recession. (Government deficit was high as well in 2010)•Korea plans to decrease the Gov. debt by: eliminating tax breaks, selling state assets, fixing up government expenditures•Fears that if government debt gets out of control, Korea will face something similar to the eurozone crisis.

Government Debt• Despite the fact that government debt has been increasing

since 10 years ago, Korea’s national debt (as a % of total GDP) is low in comparison to other countries as of 2009.

Korea’s here!Gov. Debt: 29.027% of the

GDP.Now Korea’s government

debt is over 30% of its GDP.

Summary & ConclusionCurrently:

•Government’s Primary Objectives: stable economic growth, low inflation, low unemployment, balance of payments surplus

•Korea’s economy has performed well in the past 10 years; Korean GDP expanded, and marked an annual growth of 4~5% in 2003~2007, which is considered to be a stable growth. Although the growth has been hindered, Korean’s economic growth is fairly stable.

•Relatively low unemployment rate of 3.75%. As of 2011, 28th lowest unemployment rate out of 200 countries

•Relatively low inflation rate - inflation never reached above 5% in the past 10 years

•Currently, Korea has a balance of payments surplus, however likely to have a deficit

Challenges:

Korea plans to focus on decreasing the inflation rate and government debt.

Challenges:

-Increase in oil/raw material prices is a threat to Korean economy’s growth. Korea does not have many raw materials (including land, petrol, metals, population..etc.), and import plays an essential role in development of Korean economy - growth is dependent on labor and exports to foreign markets. Since Korea lacks raw materials, it must import goods and manufacture the imported goods.

-Eurozone crisis - decrease in demand for exports

-rapidly aging population, and decrease in fertility rate. This would be a major challenge to Korea’s economy since this will result in decrease of labor force.

Generally: rapidly aging population, inflexible labor market, over-dependence on manufacturing then exporting goods to foreign market. (Korean economy is currently too dependent on exports to drive its growth)

Summary & Conclusion

• http://euromonitor.typepad.com/files/gdp-rank-final.pdf

Korea’s economic growth will be hindered - however will keep expanding for several more years. It is likely that Korea will keep being the leading country in IT and manufacturing and its economic growth will continue to base on manufacturing, service and exports.

It is predicted that Korea’s economy will expand to having 11th largest GDP in the world by 2020.

Korea is using its FoP quite effectively, and its economy is close to the PPF curve.

HOWEVER, due to the lack of raw materials, it is likely that Korea’s GDP will be surpassed by countries with more FoP in 2050 (e.g. Indonesia, Nigeria)

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