In less than twenty years, South Korea has gone from being a nation of savers to one of the most reckless borrowers in the world. On both government and household levels, South Korea is deep in debt and a crisis could be brewing in the world’s 13th largest economy.
The numbers don’t paint a pretty picture. According to a recent report by the LG Economic Research Institute, 28 percent of South Korean households are unable to make payments on their debts each month and can’t cover their monthly expenses with their current income.
South Korea has a household debt to income ratio of 155 percent.** As of the end of July, household debt totaled 647.2 trillion won (US$573.25 billion), according to the Bank of Korea.
And that debt is costly. According to a report by Statistics Korea, low-income households are paying more in interest than ever before, with the average interest monthly payment standing at 36,219 won (US$32), 13.6 higher than the year before.
It isn’t just private citizens that are in debt: as of the end of 2011, central and local government debt stood at 420.7 trillion won, according to the Ministry of Finance Central government debt was up 28.5 trillion won (US$25 billion) from the previous year. This is ironic for an administration that ran for office on a conservative, small government platform.
The Lee’s government’s aggressive spending can be partially attributed to the pressures of the 2008 global economic crisis. In times of crisis, inaction by politicians is unacceptable to South Korea’s energetic citizenry and a stimulus package of 6.1 percent of GDP was passed, the largest among OECD countries.
The Lee government’s actions in 2008 helped South Korea minimize damage of the global crash, but as of now, the medium-term outlook for the national economy isn’t great. An August 19 Federation of Korean Industries poll of 43 economic experts found 74.4 percent of respondents saying that said there is a high chance that South Korea could enter a prolonged economic slump.
In July, both the Bank of Korea and the Finance Ministry trimmed back their predicted rates of growth from 3.5 to 3 percent and to 3.3 percent from 3.7 percent, respectively.
In the past, South Koreans might have accepted lower incomes and made serious adjustments to their lifestyles, but not nowadays. Many point to the proliferation of easy credit as a turning point. “This is a new phenomenon driven by the access to credit. Credit cards companies issue cards to anyone,” said Richard Meaders, professor of international business at the Hankuk University of Foreign Studies.
But not just anyone can get a credit card or bank loan. On public message boards and light posts in the South Korean capital, in between advertisements for plastic surgery and English classes are notices for another profit-driven lending service whose patrons are hoping to get ahead in one of the world’s most competitive societies. By dialing the number at the bottom of the paper, anyone can borrow money, “no questions asked,” the notices promise.
These rings of uncertified moneylenders have become a cottage industry in recent years. They don’t follow the legal maximum interest rate of 39 percent and they’re lending to people with no option besides abandoning their dream of home ownership or prestigious education for their children. Preying on South Koreans’ ambitions of class mobility, they make loans to delinquent and unqualified borrowers at exorbitant interest rates and threaten violence if timely payments aren’t made.
The reckless accumulation of debt now taking place in South Korea is scarily reminiscent of what took place in the U.S. ahead of the crisis of 2008. While the economy here isn’t large enough to mean that a crash would have large global significance, there is an important story unfolding here about what happens when a country reaches middle power status and overextends itself, and income inequality creates unrealizable ambitions. Not everyone in South Korea can be rich, but that doesn’t stop everyone from trying.
“There’s a pattern of fear and consumption,” said Baek Sung-jin, head of the Finance Consumers Association, a civic group that provides counseling to people in financial crisis.
“People are told by big companies that if they don’t have the right things no one will want to date them or be friends with them.”
South Koreans will elect a new president in December and potential candidates from across the political spectrum are all making reference to their plans for “economic democratization.” That term is becoming one of the main issues of the election. It represents the feeling among many here that the system is stacked in favor of the wealthy and well connected, while regular people have to struggle to get ahead.
“Economic democracy means a more horizontal distribution of power between workers and management, and a smaller gap between big earners and the poor,” Song Tae-kyung, head of Citizens for Economic Democracy and an advisor to the National Assembly.
Expanded government welfare and tighter regulations on big businesses are the most commonly discussed ways of achieving this.
South Korea’s status-conscious nature makes people uneasy about publicly discussing financial distress or questionable shopping habits. In such a competitive society, it is still uncommon to hear public admissions of weakness.
But this is the world’s most wired country and the internet gives South Koreans a chance to anonymously let loose their struggles with touchy subjects.
There are online support groups for people with financial trouble where South Koreans tell their stories. A poster on Naver, one of the country’s busiest web portals writes, “We are almost bankrupt. We can’t even have a baby because we can’t afford it. But Korean society is always pressuring us, saying a baby will bring us closer together and make our family whole. But if we don’t have money we can’t support the babies.”
And the problem can’t be completely solved by the government.
“It’s a change in our culture that has led to this, and a cultural change is needed for it to change,” said Song.
Steven Borowiec is a South Korea-based writer. His work has appeared in The Guardian, The Toronto Star and Asia Sentinel, among other publications.
**Note: We have corrected the above sentence. We wish to thank our readers for their comments.