South Korea: The Unraveling of an Economy

South Korea, the poster country for the IMF in the post-East Asian crisis period, is in serious economic trouble.  That’s probably why you hear so little about what is happening there.  After a major economic collapse in 1998, the country recorded GDP growth rates of 10.9 percent and 9.3 percent in 1999 and 2000, respectively.  This led neoliberals to loudly proclaim the wisdom of the country’s forced restructuring during the height of the crisis.  However, in reality, this restructuring greatly weakened the economy.  Growth slowed dramatically in the following years, the country fell into recession in 2003, and the subsequent recovery has been weak.  In brief: South Korea is undergoing a rapid industrial hollowing-out, with severe consequences for working people.


South Korea’s post-crisis growth was initially due to aggressive government deficit spending and increases in foreign direct investment.  But, budgetary realities soon forced a reduction in government spending; foreign investment also declined rapidly beginning in 2001, once the most attractive South Korean assets had been purchased. 

Growth was maintained despite these developments because the government boosted private consumption by aggressively promoting credit card use.  It did this by, among other things, introducing tax deductions for purchases made by credit card.  The result was a credit card debt explosion.  The total amount of credit card spending rose from $53 billion in 1998 to $519 billion in 2002; household debt soared from 18 percent of GDP in 1999 to 62 percent in 2001.  Not surprisingly, delinquency rates began rising sharply in 2002.  As reported by the Korea Economic Institute, “credit card excesses . . . created spiraling social problems [including] increasing numbers of suicides, violent crime, kidnappings, and prostitution.” Frightened by the possibility that personal bankruptcies could undermine the country’s financial system, the government finally took steps to limit credit card use in early 2003.  Its success produced a sharp contraction in private consumption, which triggered a decline in business investment, and recession.

As a result of these trends, the South Korean economy is now more dependent than ever on exports.  Exports actually accounted for 98.2 percent of the country’s growth in 2003.  The situation was much the same in 2004, as consumer spending declined for much of the year and investment stagnated.  The new wrinkle is that China, rather than the U.S., has now become the main market for South Korean exports, although most of South Korean exports to China are intermediate products that receive further processing in China and are then re-exported to the U.S. (as Chinese exports).  Thus, South Korean growth prospects are now closely tied to the stability of the Chinese economy and import capacity of the United States economy.


The South Korean government is now waging an active campaign to reverse the decline in investment.  It has established free economic zones where foreign businesses can enjoy tax breaks and exemptions from various environmental and labor regulations.  It is pursuing bilateral investment and free trade agreements with many countries, including Japan and the United States.  And, it is pursuing an aggressive anti-labor offensive, which includes breaking strikes though compulsory arbitration, police interventions, and the encouragement of corporate use of civil suits; and new labor laws which promote the use of temporary workers and make unionization more difficult, especially for migrant, temporary, and public-sector workers.

These efforts have so far failed to attract foreign investment.  A major reason is that other countries, especially China, offer even more attractive investment packages.  In 2004, the head of the American Chamber of Commerce in Korea made this explicit when he said, “Korea’s competition is Shanghai, Hong Kong and China.  Realize what your competition is, because investors can choose where to go.”  He singled out the need for even more “labor flexibility.”

Government efforts have also failed to stimulate domestic investment.  Like most multinationals, the dominant chaebol are systemically shifting production to China.  In fact, according to the Korea Chamber of Commerce and Industry, “about nine out of ten companies manufacturing products in Korea have plans to invest in China in the future, as the country’s low production cost and the eager-to-please regulations make the market more attractive than Korea.”

Signs of industrial hollowing out are already visible.  For example, South Korean firms have largely stopped buying new equipment for their South Korean operations.  Before the crisis, the yearly growth rate of investment in machinery in the manufacturing sector was regularly over 20 percent.  It fell to 0 percent in 1999, 0.5 percent in 2000, and then -5.9 percent in 2001 and -4.9 percent in 2002.  While the rate of investment turned positive in 2003 and 2004, the recovery has been quite modest, 0.6 percent and 3.2 percent respectively.  To put this trend in perspective, South Korean manufacturing spending on new plant and equipment in 2004 was more than 4 percent lower than in 1996.  One consequence is that employment in manufacturing is now on the decline.

South Korea is now trapped in a self-reinforcing downward spiral.  The post-crisis neoliberal restructuring increased the economy’s dependence on foreign investment and exports.  Thus, foreign firms and the large chaebol find themselves in an excellent position to demand further concessions that, if granted, would only reinforce this same dependency. Working people have already paid a heavy price for this outcome: poverty rates remain high and inequality has hit record levels.  One reason is that the percentage of workers with irregular labor status has gone from 42 percent before the crisis to 54 percent; these workers receive only 53 percent of the wages paid to regular workers.  Perhaps the best summary indicator of social conditions comes from a 2004 Korea Broadcasting System survey, which found that “more than half of South Koreans feel that the current economic situation is worse than it was in late 1997 when the financial crisis shook the nation.” 

In a future post, I will examine worker responses to these trends.

Martin Hart-Landsberg is professor of economics at Lewis and Clark College, in Portland, Oregon, and author of The Rush to Development: Economic Change and Political Struggle in South Korea and Korea: Division, Reunification, and U.S. Foreign Policy. Hart-Landsberg co-authored (with Paul Burkett) China and Socialism: Market Reforms and Class Struggle (Monthly Review Press, 2005).