[KVOLUTION]

By Lee Hyo-sik
Staff Reporter

South Korea was one of the poorest countries in the world when it became an independent state on Aug. 15, 1948, three years after its liberation from Japanese colonial rule. Over the past 60 years, however, it has risen from the ashes of the Korean War and became the world's 13th largest economy, playing an increasingly important role on the international stage.

At the time of a global financial crisis and looming worldwide economic downturn, there is a growing need to correctly assess the nation's economic strengths and weaknesses to better deal with the current difficulties. In this regard, The Korea Times points out 10 strong and weak points of the Korean economy.

1. Widening Wealth Disparity


The income disparity between the rich and poor has been deepening over the years, despite government efforts to improve the distribution of wealth. According to the National Statistical Office (NSO), the top 20 percent of income earners earned 7.46 times more than the poorest 20 percent in the second quarter of the year, the widest gap since 2003.

A growing number of poorer households are spending more than they earn as a result of the soaring prices of oil and other imported commodities. More families are seeing their income grow at a much slower pace amid the tight job market stemming from the economic downturn.

The bearish stock market and falling home prices are not helping, either, with many having to pay higher interest on loans amid rising rates.

The disparity between the top 20 percent and the bottom 20 percent has been increasing since 2003 when President Roh Moo-hyun took office, despite his government's policy priority on redistributing wealth to diminish the gap between the haves and have-nots rather than focusing on economic expansion.

Against this backdrop, President Lee Myung-bak has pledged to reduce the income disparity through tax cuts, deregulation and other market economy principles, rather than through the expansion of welfare programs.

Lee stressed his policy approach would encourage large and small businesses to expand investment and create jobs, improving the financial standing of the middle-and low-income brackets.

But with a global economic downturn and sluggish domestic consumption, many say it will be highly unlikely for Lee's policies to achieve his intended goals.



2. Job Shortage

The number of new job offerings has fallen this year as businesses became more reluctant to hire new workers amid an increasingly pessimistic economic outlook as a result of soaring oil prices and the global economic slowdown. The worsening job market conditions have started a vicious circle in which decreased household income leads to lower consumption and savings, causing companies to slash production and investment, resulting in even fewer new jobs.

The statistical office said the number of people with jobs totaled 23.7 million in September, growing a mere 112,000, or 0.5 percent, from a year ago. The job creation figure, slightly over 110,000, is the smallest since February 2005 ― it also falls far short of the government's target of 200,000.

The government has unveiled a range of tax cuts and deregulation measures over the past few months in an effort to promote corporate investment, consumption and job creation.

Additionally, it plans to spend one trillion won over the next five years to train 100,000 young people in renewable energy development and other future-growth businesses to ease growing unemployment among university graduates.

But the nation's job market is widely projected to remain depressed as businesses will not hire many new workers. Exporters are concerned about a drop in overseas shipments because of the global economic slowdown, while domestic market-oriented firms are troubled by decreasing private spending.



3. Slowing Economic Growth


The Korean economy has been growing at a much slower pace over the past decade since the 1997-98 Asian financial crisis. Many say the currency crisis chipped away at the nation's growth potential by making businesses and households more vulnerable to outside shocks.

Korea's gross domestic product (GDP) expanded at its slowest rate in four years in the third quarter, raising fears that Asia's fourth largest economy is entering a recession.

The Bank of Korea (BOK) reported Friday that the gross domestic product (GDP) grew 3.9 percent year-on-year in the third quarter, the slowest since the second quarter of 2005, with the fallout from the global recession creeping into the nation's exports.

On a quarter-on-quarter basis, the economy expanded 0.6 percent between July and September, the weakest growth in four years since the economy grew 0.5 percent in the third quarter of 2004.

With the worsening global economic conditions and falling domestic consumption, the nation will not likely achieve higher growth for the foreseeable future.



4. Heavy External Dependence


Exports are Korea's main growth engine, accounting for about 50 percent of GDP, making it one of the world's most export-dependent economies. This makes the nation more susceptible to outside shocks, leaving its fate in the hands of the United States and other major export destinations.

In contrast, Korea has a small domestic market with 48 million people, much smaller than those of China and Japan. It means the country is influenced by what happens abroad to a greater extent.

As the world economy is increasingly losing steam in the wake of the unfolding financial market meltdown, the nation's outbound shipments posted single-digit growth of 8.1 percent year-on-year in the third quarter, compared with 12.5 percent the previous quarter. Exports contracted 1.8 percent quarter-on-quarter.

Outbound shipments of Korean-made goods are projected to further decrease in the coming months on falling overseas demand as consumers in America and other major economies will tighten their purse strings and spend less against declining asset values and rising jobless rates.



5. Weakness of Services Industry

The weak services industry has been the main culprit behind the nation's worsening current account balance in recent years, offsetting strong export growth.

A growing number of Koreans are spending money abroad for leisure, medical, educational and other services as the domestic sectors have failed to provide those that people want at an affordable price.

The government has unveiled a series of comprehensive measures, including deregulation and tax cuts, aimed at strengthening the competitiveness of the services industry, to encourage locals to spend here rather than abroad, and attract more inbound tourists. But this has failed to materialize.

Korea's service industry is not competitive, compared with that of other countries, because small-scale self-employed businesses make up for the majority of the nation's services providers. They are not able to offer high quality services at affordable prices because of their small size and weak finances.

The number of self-employed who usually operate restaurants and other small shops has increased at an explosive pace since the 1997-98 financial crisis, making the entire services sector more vulnerable to changes in economic conditions. In recent years, many were forced to shutter their businesses on sluggish domestic consumption.

The outlook for the nation's services sector is not too bright unless it undergoes major restructuring to become mostly large-sized and more capital-intensive providers.



6. Small Foreign Exchange Market

The won-dollar rate has been extremely volatile in recent months, having a negative impact on businesses and households. Many say a relatively small foreign exchange market here and mostly dollar-based transactions are the main culprits behind the volatile exchange rate.

According to Samsung Economic Research Institute, currency exchanges worth $33 billion are made on average per day, accounting for only 0.8 percent of the worldwide foreign exchange transactions.

The institute said a recent unstable won-dollar rate was not because of deteriorating economic fundamentals, but because of the small and underdeveloped currency market here.

To ease changes in the foreign exchange rates and thus help exporters and households, it is imperative for the nation to expand the size of its currency market.



7. Falling FDI

South Korea has become an unattractive place in the eyes of international investors as inbound foreign investment into the world's 13th largest economy has fallen over the past few years.

According to the United Nations Conference on Trade and Development (UNCTAD) foreign direct investment (FDI) into Korea reached $2.63 billion last year, down 46 percent from $4.88 billion in 2006, falling for the third consecutive year. Its global ranking also dropped by 13 notches to 60th during the one-year period.

The agency said the country's falling economic growth, surging oil prices and a drop in the number of domestic companies for sale contributed to pushing down its 2007 FDI global ranking.

This year's global FDI will likely decrease from 2007, weighed down by the ongoing worldwide credit market crunch triggered by the U.S. subprime mortgage defaults and the global economic downturn.

Many foreigners cite the nation's rigid labor market, regulatory uncertainty and heavy regulations as some of the negatives that make them reluctant to do business here. If Korea wants to become a financial and business hub for Northeast Asia, it has a long way to go.



8. Uneasy Management-Labor Relations


Militant labor unions is one of the most cited reasons making foreign investors and companies hesitant to come and do business here.

The nation's rigid labor market is partly responsible for the rocky management-labor relations by overprotecting workers' rights. The strong labor rights also discourage companies from hiring new workers, further worsening the youth unemployment problem.

More than any other industry, Korea's auto sector has been plagued with frequent labor strikes over the past years. Hyundai Motor and its affiliate Kia Motors have been hit hard by strikes at least once every year, disrupting production and causing billions of dollars in losses.

Creating sound management and labor relations requires strong commitments and efforts from both sides. CEOs and executives should try to provide as many benefits as possible to employees and improve working conditions, while workers should fully cooperate with management in a constructive manner for the development of the company.



9. High-Priced Real Estate

Despite falling home and other property prices over the past year, many say the nation's real estate is overpriced, compared to its income levels.

High home and land prices force homeowners to borrow money from banks and pay interest payments, leaving less disposable income in consumers' pocket for spending, while making businesses more reluctant to build plants here and to move to China and emerging economies.

Foreign investors and companies also cite high-priced real estate as one of main obstacles to investing here, shifting to other Asian countries in which land is cheaper.

At the height of real estate price hike in late 2006, urban households had to save their entire salaries for an average of 11 years to purchase a mid-sized apartment in Seoul.

Households, which earned an average of 3.42 million won per month in the third quarter, are required to save their whole wage for 11 years to buy a 32-pyong (105.6 square meters) apartment in Seoul, priced at 451 million won, according to Real Estate Bank, an online real estate information provider.

In the affluent Kangnam, Socho and Songpa areas of southern Seoul, households needed to save for 22 years and five months to purchase a 32-pyong apartment.

The government should increase home supply and introduce other measures to stabilize house prices, while providing industrial sites at cheaper prices to encourage Korean and foreign businesses to invest here.



10. Rapidly Aging Population

South Korea is projected to become a country with one of the highest percentages of elderly people in the world by 2050, as Koreans are having fewer babies and living longer than their counterparts in other nations.

With the rapid population aging and falling birthrates, the elderly over 65 will account for 38.2 percent of the country's population in 2050, higher than the world average of 16.2 percent, according to the National Statistical Office. Koreans aged over 80 will account for 14.5 percent of the population in 2050, higher than the average 9.4 percent in developed countries.

But the portion of people aged below 14 will decrease to 8.9 percent from 19.2 percent in 2005. A drop in the number of young workers is making Korea's workforce older, weakening its economic vitality in the long run.

The public and private sectors should join hands together to increase the birthrate and encourage more women to participate in economic activities.

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