South Korea’s emphasis on manufacturing saw the country rise from poverty to the world’s 11th largest economy in the span of two generations. However, this created an over-reliance on manufacturing. In addition to being an external challenge, the reliance on manufacturing has led to serious internal structural challenges for South Korea.
The country’s major export industries are those that lend themselves to cost efficiency and consolidation, which has given rise to a group of large conglomerations, or “chaebols.” The top 10 chaebols – including Samsung, Hyundai and Lotte – make up an estimated 75-80 percent of South Korea’s economy. Downward pressure on wages has led to a recent string of protests, including a series of strikes at Hyundai that have put serious economic strains on the company and, subsequently, the entire South Korean economy. The chaebol-centric manufacturing industry has also stifled the growth of SMEs, which further promotes the country’s over-reliance on these conglomerations. Though the chaebols have certainly contributed a net positive to South Korea’s economy, their prominence and success have encouraged the development of an economic environment that is heavily dependent on manufacturing, and this further discourages the development of a service industry.
Here, the government is in a precarious position. The chaebols hold political sway, and South Korea must walk the line between the conglomerates and the public. To get money out of the chaebols’ coffers and back into the economy, the government has introduced a 10 percent tax penalty on excessive holdings. It has also promoted tax breaks for companies that use reserves to increase wages, investments and dividends. Additionally, to encourage the growth of the service industry and a healthier number of SMEs, the government has also moved to introduce legislation that will make it easier to promote good workers and fire poorly performing employees.
South Korea’s current workplace culture awards promotions and job security based on age and tenure rather than performance. The difficulty of firing poorly performing employees places a strain on productivity and efficiency, and it falsely inflates the country’s 4 percent unemployment rate. This low number masks the high percentage of part-time and contract workers in the South Korean economy (the result of companies being afraid to hire new employees). To achieve global-norm flexibility in hiring practices, the South Korean government has made moves to implement legislation that shifts workplace culture to reward performance over seniority, which was another cause for the protests at Hyundai and other corporations. South Korean trade unions are powerful and are often seen as militant. Continuing this path of legislative changes will likely provoke further public discontent, possibly even violence, which has made these changes a source of debate and disagreement within the government. Passing such legislation, however, would be a step towards greater efficiency and would help promote the growth of more SMEs.
For the last several years, South Korea has also been challenged by rapidly expanding levels of household debt, which threatens the economy by putting a damper on already slowing domestic consumption. In 2014, the government cut interest rates three times in an effort to boost domestic demand. Even so, South Korea’s total household debt rose to a record high of 1,060 trillion won in 2015. The ratio of debt to disposable income was approximately 160 percent. This is higher than the OECD average and, as many have pointed out, is similar to U.S. figures at the start of the subprime mortgage crisis.
The South Korean financial sector has grown in size, but it has also contributed less to the country’s GDP since the global financial crisis due to shrinking internal financial activities. According to a recent report published by the National Assembly Research Service, the financial industry accounted for only 4 percent of South Korea’s GDP in 2014 – a 1.2 percent drop from 2007. In April, Moody’s Investors Service reported that it would change its outlook on South Korea’s banking system from stable to negative, citing deteriorating creditworthiness over the next year and a half. Precarious financial institutions become even more of a concern when considering the rapidly expanding levels of debt – if default rates begin to rise and the banks are not able to absorb the shock, South Korea could face a banking crisis, which would surely have a negative impact on its economy.
Conclusión
South Korea’s economy faces a host of internal and external threats. Though the largest of these are tied to the global exporters’ crisis, the current economic slump has also revealed a host of internal economic problems. These have manifested in political issues as the government works to make long-term readjustments while also providing short-term solutions to stimulate the economy. These efforts to address both long- and short-term problems have varied in success, but may indeed succeed in moving the South Korean economy away from its dependence on China and its over-reliance on the manufacturing economy.
In the past, South Korea has demonstrated economic resiliency and adaptability. This can, in part, be attributed to a political culture of discipline and swift action, which has historically been supported by its population. However, a successful transition remains a long way off. The shift to a service economy cannot happen overnight, and the South Korean government is already facing domestic pushback and political roadblocks to making the changes necessary for such a transition.
South Korea’s current economic reality is that of a manufacturing economy dependent on exports, which have been reduced by the exporters’ crisis and weak global demand. These problems have been compounded by internal structural issues, growing national and household debt and increasingly precarious financial institutions. As a result, it is likely that South Korea will continue to feel the squeeze of the global exporters’ crisis.
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