As 2017 came to a close, a variety of news outlets were trumpeting signs of optimism for the South Korean economy. At the top of the list was the unexpectedly strong showing in GDP, which increased by 3.6 percent from October to October, the highest rate in seven years. South Korean exports were up 18 percent during this period, riding high global demand for semiconductors and electric vehicles. Even South Korean seafood exports were up 10 percent. After enduring a grueling impeachment scandal and unease with North Korea, it appeared the South Korean economy was making headway in a return to prosperity.
Yet, a closer examination of the domestic numbers paints a different picture for sustained growth, especially for average South Koreans.
For average households, improvements in the South Korean economy have yet to translate to everyday experience. At first blush, it would appear that average household income has increased since last year by about 2.1 percent. However, when adjusted for inflation, it turns out this figure has actually decreased by 0.2 percent. In fact, when adjusted for inflation, household incomes in South Korea have been on a small but steady decline for three straight years, decreasing an average of 0.11 percent per year.
Hand in hand with income stagnation has been a corresponding increase in income disparity. South Korea now has the highest income inequality in Asia, with the top 10 percent earning about 45 percent of all income. The second highest country, Singapore, comes in at 42 percent with Japan a close third at 41 percent. Korea’s income quintile ratio (income of the richest 20 percent divided by the income of the poorest 20 percent) reached 5.2 in the third quarter of 2017, up from 4.8 the previous year. This disparity occurred despite significant increases in earnings from assets and business revenue valued at $18 and $900, respectively, when calculated per household. Such an average calculation is misleading, however, since the vast majority of average Korean households do not possess these sources of income, concentrating disproportionate gains in the hands of the wealthy, a common trend in just about every country.
Adding to income stagnation is the burden of household debt. In 2017, the average Korean household owed about $65,000, an increase of 4.5 percent since 2016. With average household income hovering around $50,000, this means an average debt to income ratio of about 130 percent and household debt to GDP ratio of about 94 percent, significantly higher than Japan’s household debt to GDP ratio of 57 percent and the U.S. ratio of 78 percent. In November, the South Korean central bank raised interest rates for the first time in six years, exacerbating the situation for many households, especially those paying variable interest on their debt or looking to refinance. Many have already speculated the increased rates will likely depress domestic consumption in 2018 as more households are forced to devote more money to pay debt.
Sustained domestic consumption is something many analysts have already pointed to as being critical to maintaining South Korea’s GDP growth in 2018. This is something South Korea’s continued export dependence makes challenging, since GDP growth from exports is often uncoupled from domestic consumption: i.e. profits from exports tend not to result in more money being spent domestically. The central bank’s interest rate increase was, of course, an attempt by the government to capture some of these export profits, as were the recent increases in corporate tax and income tax rate for the wealthiest South Koreans. These latter tax efforts were implemented specifically to help finance President Moon Jae-in’s job creation plan, but it remains to be seen how much these measures might actually depress domestic consumption by leaving businesses and the wealthy with less to spend.
In addition to export dependence and debt, another key stressor for domestic consumption has been poor retirement planning. A shocking report published last month showed that about 60 percent of all middle class households were on course to live in poverty upon retirement. As the implications of this report continue to circulate in the next few months, they are likely to motivate efforts by the government to help people invest more in retirement funds, likely depressing domestic consumption even further, especially in light of the government’s recent moves to encourage investments abroad. With a rapidly aging population, this does not bode well for South Korea’s low domestic demand, which already stands among the lowest of OECD nations.
A key target of Moon’s job creation plan has been the lack of employment for young adults. In 2017, youth and young adult unemployment hit a new high of 9.9 percent with over a million between the ages of 15-29 remaining unemployed. Figures for underemployment have been difficult to come by but sentimental unemployment (defined as the sum of those reporting unemployment and/or participation in part-time work against their will) has been reported to be 22.5 percent at the end of last year. With Moon’s job plan promising the creation of 800,000 public sector jobs, it remains to be seen how successful the new taxes will be in stimulating domestic growth. The irony of Moon’s plan is that it appears to have already caused a temporary spike in unemployment as a significant number of employees have quit their private sector jobs in anticipation of competing for the new public sector ones scheduled to become available.
South Korea’s strong economic showing in 2017 has also resulted in a significant improvement in the strength of its currency. In the short run, this is likely a good thing as the PyeongChang Olympics are right around the corner, allowing a strong Korean won to bolster the value added through foreign tourism. However, with Olympic accommodation bookings at a paltry 30 percent, it appears unlikely the event will give as much economic lift as once hoped. With oil prices expected to rise steadily this year, maintenance of a strong currency might help alleviate increases in average household expenses, but will likely do so at the expense of value added through exports, making it important to strike a balance between the two opposing factors.
A final uncertainty this year is the increase in minimum wage, which has already started kicking in this month. Although South Korea’s minimum wage has been increasing steadily for the last 20 years, this year’s hike is historic: a 16.4 percent increase over last year, bringing the rate to about $7. The government hopes this will help stimulate domestic consumption but it remains unclear how small businesses will afford it. Initial reports indicate small losses in employment and decreases in the number of convenience stores since the wage hike started. Coupled with implementation of the anti-graft Kim Young-ran Act, which already helped to depress restaurant and pub business by 3.1 percent in 2017, it remains to be seen how the prices of goods and services will respond and whether the wage increase will result in any real increase in disposable household income as intended or simply stimulate a higher consumer price index, which marked its largest increase in five years at the end of 2017.
With the South Korean government targeting further minimum wage hikes each year to obtain a final wage of $9.50 by 2022, a lot of uncertainty looms despite current prognostications that South Korea’s overall economic situation in 2018 will remain robust. What is clear is that Moon has chosen to develop the economy through an emphasis on domestic consumption and job creation through government taxes, a strategy that runs contrary to the current trend in most European countries. At the very least, one must admit Moon’s approach has been consistent and decisive, with a clear faith in the idea that government intervention gives better control over the economic situation. While many foreign observers seem to have adopted the simplistic notion that prospects of war with North Korea will be the primary driver of South Korean economic outcomes in 2018, the numbers presented here argue for a much more complex and nuanced picture with domestic conditions acting as primary determinants, assuming, of course, the continued absence of any actual armed conflict with Pyongyang.
Justin Fendos is a professor at Dongseo University in South Korea and the associate director of the Tan School at Fudan University in Shanghai.