Falling dragon: South Korea braces for economic chaos

South Korea's Ministry of Economy and Finance announced in January that national debt has surpassed KRW700 trillion (€544.4 billion) for the first time in the nation's history.

South Korea's sovereign debt as of the end of November 2019 added up to KRW704.5 trillion with a month-on-month increase of six trillion won. Debt is up by KRW53 trillion in the last year alone, working out at KRW14.1 million for every South Korean man, woman and child. The increase was the sharpest on record with fiscal expenditures rising and tax revenues declining.

Statistics Korea is expected to release new employment figures, along with details on exports and investment in construction facilities, later this week.  Given the poor figures of recent months, economists are bracing themselves for more bad news.

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Unemployment woes

Adding to Seoul's economic concerns, corporate investment has contracted every quarter since April-June 2018 and that trend is expected to continue when the figures for the last three months of 2019 are announced in late January.

The country's diminishing business appeal has seen foreign direct investment into South Korea tumble 13.3% to US $23.3 billion (€20.9 billion) in 2019. To complicate matters, government statistics show that workers went on strike more often than usual in 2019, losing 402,000 work days in total. According to the Korea Labor Institute, South Korea lost 43.2 work days per 1,000 workers to strikes, compared to only 3.1 days in the US and just 0.25 days in Japan.

Unemployment, a particular  concern in President Moon Jae-in's government, persists despite a number of target-based initiatives. People between the ages of 25-29 make up 21.6% of all unemployed people South Korea, the highest figure of all member states of the Organization for Economic Cooperation and Development.

'Deep depression'

Experts warn that Moon's government, which swept to power in May 2017 on the promises of more jobs and broader prosperity for South Koreans, is failing to fulfill its campaign pledge.

"I am very pessimistic. I believe that the economy is potentially at serious risk, for both domestic and external reasons," said Dr Park Saing-in, an economist at Seoul National University. "I have heard some people say that we will follow in Japan’s footsteps and experience two ‘lost economic decades' … I believe it will be worse," he told DW.

"The two situations are different in terms of the concentration of industry and big companies," he added. "If South Korea goes into a deep depression, that will trigger an economic crisis like we saw in 1997. It will be a systemic crisis."

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Trade wars

The South Korean government, somewhat confident that the problems are merely a hiccup, has predicted that the national economy will grow 2.4% this year in contrast to 2% in 2019 — its most anemic growth since 2009.

But economists are skeptical, pointing to a number of factors beyond Moon's control. The trade war between China and the United States has dealt a severe blow to South Korea. More recently, a dispute with Japan over differing interpretations of their shared histories has spilled over into the trade arena, with Tokyo imposing restrictions on exports of chemicals that are critical to South Korea’s semiconductor industry.

The causes of the problems are not, however, all external. Immediately after entering office, Moon's government sharply raised the country's minimum wage and reduced maximum working hours in the hopes it would generate income led-growth. Instead, small and medium-sized companies, already operating on thin margins, were forced to lay off workers while others went bankrupt.

Widening gaps in equality

Moon's efforts to reduce the gap between the wealthy and the poor have not yet paid off. "The president promised to make South Korea fairer when he was elected," said Munseob Lee, a professor at the School of Global Policy and Strategy at the University of California San Diego.

"Korea also faces multiple structural issues," Lee added. "What concerns me most is labor market inequality. Among OECD countries, Korea has the highest gender wage gap and the eighth highest self-employment rate. That increased overall inequality and hinders the inclusive growth of the Korean economy."

Moon has also been hampered by a number of political crises since his rise to power. A nepotism scandal echoed the scandal that lead to the impeachment of the country's previous president, Park Geun-hye. Combined with the recent trade war with Japan, economic uncertainty has become even stronger than during the impeachment.

"I believe Korea's economy has strong fundamentals, but it is facing political and structural headwinds," said Lee.

Dwindling support

Moon's public support rate stood above 80% in his early months in office, reflecting broad belief in the promises that he made ahead of the election. Today, his support rate hovers around 48%, which is an improvement on the 40% recorded in the latter half of last year.

Economic concerns dominate South Korean media and public discourse but, with elections scheduled for April, ordinary South Korean people will soon have the opportunity to demonstrate their thoughts on the very issues that arguably affects them more than anyone else.