Issues Facing the South Korean Economy
South Korea has several issues facing its economy. These include high household debt, which will reach 200% by 2020. This ratio is the fifth highest among OECD countries. This has been driven up by large mortgage lending flows, which have also helped drive up property prices. This problem creates macroeconomic vulnerability and makes the country vulnerable to monetary policy tightening.
Exports
South Korea has a diversified export portfolio and is highly competitive in the global market. Its exports are comprised of various industries including electrical machinery and equipment, automobiles, computers, semiconductors, and optical, cinematographic, and measuring equipment. The country also imports a variety of goods from other countries.
Despite the risks facing the global economy, South Korea’s exports have remained resilient. Despite the Chinese government’s recent Covid-19 trade lockdown and the deteriorating trade balance with China, South Korean exports have continued to grow at a rapid pace. In the first 20 days of July, South Korea’s exports rose 14.5% while imports increased by 25.4%, creating a trade deficit of US$8.1 billion.
South Korea is the seventh largest exporter in the world. Its trade volume reached USD one trillion for four consecutive years, before declining a bit in 2015 and 2016. The trade volume rose again to USD one trillion in 2017, and in 2018 it reached a trade surplus of $29.4 billion. Therefore, South Korea’s exports are now positive net exports. Investopedia defines positive net exports as total exports minus total imports.
The FTA includes a legally binding chapter on Trade and Sustainable Development (TSD). South Korea has not yet complied with the TSD chapter obligations, but is currently amending labour laws to improve the working environment. It also has an annual trade committee at the ministerial level. Its role is to monitor the functioning of the free trade deal and make sure it is being implemented as planned.
The rapid growth in South Korea’s exports has created a significant imbalance between the country’s large enterprises and SMEs. Shared growth, which is a concept that addresses this imbalance, has been identified as a solution. During the global economic crisis of 2008, this concept was acknowledged as a global issue.
Foreign exchange reserves
The South Korean economy was able to weather the recent financial crisis because of a high level of foreign exchange reserves and low ratio of short-term debt. As of August 2016, the South Korean government had a foreign exchange reserve of nearly 21 trillion won, more than double the amount held in 1997. The country also has a sizeable stock of international assets, which are about US$2.12 trillion in value.
The country has a large amount of foreign currency reserves, but they are declining. The central bank is taking measures to stabilize the foreign exchange market. These measures include dollar selling intervention and decreasing converted value of financial institutions’ foreign currency deposits. Despite this, the South Korean won has been depreciating against the dollar and has hit its lowest level since March 2009.
The financial crisis that struck Korea was probably triggered by the government’s high interest rates and leverage. The failure to raise interest rates would have triggered even more capital outflows and would have further exacerbated the crisis. By mid-December 1997, Korea’s foreign exchange reserves were nearly exhausted.
The Korean crisis has raised questions about the effectiveness of the IMF’s policies. There have been several heated debates about the IMF’s recommendations for Korea and other crisis-hit Asian countries. However, the differences between the arguments for and against the IMF’s policy were as wide as the contrast between the high-growth period and the onset of the crisis. As a result, it was not easy to figure out who was right in the early post-crisis period. However, the full effects of the IMF’s policy will be apparent in time.
In 2001, the Korean economy was doing much better than most, with a moderate economic growth of three percent. By the first half of 2002, however, most analysts revised up their forecasts for the Korean economy. Most economists projected a six to seven percent expansion in 2002. However, it was unclear whether the country would be able to regain its high growth levels.
Welfare system
South Korea’s welfare system, which is designed to provide health care, housing, and other social benefits to low-income residents, is criticized for its failure to identify those in need of assistance. Although the government has taken strenuous steps to improve the system, it still has blind spots. One of these loopholes, the failure to report change of address, is responsible for the recent suicide of a family of three. Financial pressures and evictions often force families to change residences. It is estimated that about 240,000 people do not have a fixed address.
The development of the welfare system in Korea was most likely spurred by a dramatic transformation in the country’s economic circumstances. This transformation reduced the number of extended families and weakened family economic capacity. In addition, it led to the emergence of a nuclear family model and a decline in family capacity to care for old people.
Foreigners living in South Korea who suffer from disabilities are eligible for the same welfare benefits as citizens of South Korea. Applicants can obtain information about these benefits by visiting their local district office. They can also fill out an application form for a People With Disabilities (PWD) card. After receiving the PWD card, they can start receiving benefits.
Another important change is the shift to local government welfare budgets. Local governments have increased their spending on welfare programs since the 1990s. This shift may reflect the development of the Korean democracy and the nation’s gradual transformation to a welfare state. In addition, the local governments are now responsible for the implementation of welfare projects, which were previously implemented by the central government. Furthermore, the rise of welfare spending may be a response to rising income inequality and public demands for redistribution.
