Download 10th largest importer

SOUTH KOREAN
ECONOMY
by Jaeyeon Hwang
image from: http://www.freeppt.net/background/korean-flag-backgrounds-forpowerpoint.jpg
Overview
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15th largest economy (nomial GDP), 12th largest (PPP)
economy in the world as of 2010
One of the four ‘Asian Tigers’ (countries that maintained
high growth rate of approx. 7% annually since the
1960’s due to exports and industrialization)
7th largest exporter, 10th largest importer
(http://www.economywatch.com/world_economy/south-korea/export-import.html)
largest economic sector - service sector making up
57.6% of the economy as of 2008. (Agriculture: 3% and
manufacture: 39.4%)
leader in IT sector (leading companies, Samsung and
LG receives subsidies from the government)
Economic Growth
South Korean GDP based on PPP
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stable, continuing growth
Especially stable during 2003~2007: 4~5% annual growth
downfall in 2008~2009 during the “late-2000s recession”
however, strong recovery in late 2009
Economic Growth
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Korean Economy was very stable during 2003~2007 marking 4~5% annual growth
During the ‘Great Recession’ in 2008, South Korean Economy faced a downturn,
however was able to prevent recession, or negative outward gap; GDP growth rate
decreased by 5.1% compared to the previous quarter.
GDP growth halted during 2008-2009, however recovered in the 3rd quarter of 2009
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Economic Growth
Korean government is more Keynesinist; Korean government and
business is closely tied (e.g. directed credit and import restrictions)
7th largest exporter, 10th largest importer
(http://www.economywatch.com)
After the Asian financial crisis in 1997-98, economic reforms were
made - Korea got more open to foreign investment & import.
Government promoted the import of raw materials and technology
instead of consumer goods. Korea’s factors of production is not
as strong as other countries - hence its growth was based mostly
on importing raw materials and technology, then manufacturing
and exporting goods made from the raw materials (e.g. cellphones,
electronics). Growth is based on injections (export).
Encouraged savings & investment over consumption. (Decrease
expenditure)
During the “late-2000 recession” Korea’s economy faced a
downturn, however was able to avoid recession and recovered in
3rd quarter due to export growth, low interest rates and
expansionary fiscal policy = over 6% growth in 2010
Boosted injection in order to prevent recession (export growth, low
interest rates (cost of borrowing money decreases, more people
will take a loan for consumption or for investment - there is less risk
of investment by taking a loan, since the interest rate is low), and
fiscal policy (increase in government expenditures/decrease in
taxes in order to decrease the government’s budget deficit or
increase the budget surplus).
Unemployment
•Average Unemployment rate: 3.75%
•As of 2011, 28th lowest unemployment rate out of 200 countries.
•In 2002~2008, the growth of Korean economy was stable - hence the unemployment rate stayed relatively low.
•2009~2010, Korean economy faced a temporary downturn - the unemployment rate gradually increased, and hit 4.8% in
early 2010.
•January 2010: Government spent money on public investment and subsidies(to companies, households, local gov.) and
boosted the economy; this created approx. 200,000 new jobs; unemployment rate fell.
•However, eurozone crisis and high costs of oil/raw materials are affecting the Korean economy negatively, since Korea’s
economy is highly based on exports - Unemployment rate is rising again.
Inflation
•Government was able to maintain a low, targeted inflation rate in 2006~2008, despite the high oil prices and unstable foreign
exchange rate.
•3.3% inflation rate in 2006~2008.
•Mid-2008 inflation rate soared along with oil prices. (Cost of production rose)
•As world’s 10th largest importer, and 5th largest importer of oil - rising oil prices and weak WON in 2008-2009 made it difficult
import many goods, hence soared the inflation rate.
•Again, inflation rate increased in 2011 due to high oil/raw materials prices.
•Interest rates had to stay high - bank raised the rate 3 times in 2011 to ease inflation rate.
•Eurozone crisis - reducing export demand
•Inflation has fallen again in 2012 - in February the “inflation rate fell to 14 month low”
from http://www.global-rates.com/economic-indicators/inflation/consumer-prices/cpi/southkorea.aspx
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Balance of Payments
Korea is the world’s 7th largest exporter, and the 10th largest
importer
Korea had constant balance of payments surplus in the earlymid 2000. Korea imported large amount of raw materials and
technology, and manufactured goods and exported them for
profit.
2001: $13.4 billion surplus (export: $151.4 billion, $138 billion)
2002: $12.6 billion surplus (export: $159.2 billion, import:
$146.6 billion)
In 2008, following the global recession, Korea’s balance of
payments deficit was $56.4 billion, which was the largest
deficit Korea had in the past 10 years. The high prices of raw
materials, esp. oil and weak Korean Won lead to this high BoP
deficit - this was followed by a downturn of Korean economy in
2008.
In Jan 2009, as Korea’s economy started to recover, Korea’s
balance of payments surplus marked the biggest monthly
surplus of $4.5 billion, since May 2007.
Jan 2012: $2.2 billion surplus, despite the BoP deficit in the
previous month - due to rise in demand for Korean
manufactured goods, which increased the export by 22.7%
Images from: http://www.inkytea.com/crystalboy/files/2011/08/samsunglogo.jpg
http://blogs-images.forbes.com/elizabethwoyke/files/2012/01/LG-LOGO.jpg
Currently:
Difficult for Korea to increase BoP
surplus :(
-High prices of raw materials (esp. oil)
and weak WON is making it difficult
for Korea to import goods cheaply
(hence increasing import cost)
-Moreover the eurozone crisis is a
threat to Korea’s exports - EU is
Korea’s 2nd largest trade partner,
however in 2011 (following the
eurozone crisis, which is still ongoing)
Korea’s export to EU fell by approx.
20%.
If Korea’s export decreases as well, it
is likely to result in BoP deficit.
Equality of Income
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In 2000s, along with the expansion
of the Korean economy, middle
class grew - following the growth of
middle class, the income equality
has become ‘more equal’ compared
to 1990-2000.
Now upper class is rapidly growing,
and decreasing the ‘equality of
income’. The Gini Index (top
10%/bottom 10%) has been
increasing, which suggests the
equality of income has become less
equal, as you can see from table 1.
Table 1
Ratio of average
income of the top 10%
and bottom 10%
2001
Ratio of average
income of the top 10%
and bottom 10%
2006
Ratio of average
income of the top 10%
and bottom 10%
Now
4.8
5.4
7.8
graph 1
However, compared to 1990-2000,
Korea’s equality of income has
become more equal. (refer to graph
1)
graph from:
http://www.google.co.jp/imgres?um=1&hl=ja&biw=1002&bih=621&tbm=isch&tbnid=_fwuc5l_TssFOM:&imgrefurl=http://www.oxfamblogs
.org/fp2p/%3Fp%3D8352&docid=FufXLZiFy8eTiM&imgurl=http://www.oxfamblogs.org/fp2p/wp-content/uploads/G20-inequalityhttp://www.oecd.org/dataoecd/44/52/37962502.pdf
Annual Gov. Budgets
South Korean annual government budget is in a relatively fine shape - over the past 10 years, Korea
has never had a budget deficit until 2010.
•Korea follows principle of “spending within budget” (http://www.adbi.org)
•2009 - Global Financial Crisis. GDP growth rate decreased. Government expenditure increased, but
tax revenues remained almost equivalent to 2008. Like many other countries deficit in 2009.
•4.1% Government Deficit in 2010 - approximately 70% of annual national budget was used to get
Korea out of global financial downturn for the first half of 2010.
•Planning to cut government deficit this year, in order to increase government budget.
Government Debt
•Increasing government debt due to:
•aging population (increase in health/pension expenditure), and low birth rate
•increase in issuance of government bonds (to fund the ‘large scale supplementary budget’)
•National Debt - nearly doubled over the past 7 years
•Historically high debt of 32.56% (of the total GDP) in December 2009
•Government debt was high during the end of 2009~2010, since the government had to recover the Korean
economy from a temporary downfall and prevent recession. (Government deficit was high as well in 2010)
•Korea plans to decrease the Gov. debt by: eliminating tax breaks, selling state assets, fixing up government
expenditures
•Fears that if government debt gets out of control, Korea will face something similar to the eurozone crisis.
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Government Debt
Despite the fact that government debt has been increasing
since 10 years ago, Korea’s national debt (as a % of total
GDP) is low in comparison to other countries as of 2009.
Korea’s here!
Gov. Debt: 29.027% of the
GDP.
Now Korea’s government debt
is over 30% of its GDP.
Summary &
Conclusion
Challenges:
Currently:
Government’s Primary Objectives: stable
conomic growth, low inflation, low
nemployment, balance of payments surplus
Korea’s economy has performed well in the past
0 years; Korean GDP expanded, and marked an
nnual growth of 4~5% in 2003~2007, which is
onsidered to be a stable growth. Although the
rowth has been hindered, Korean’s economic
rowth is fairly stable.
Relatively low unemployment rate of 3.75%. As of
011, 28th lowest unemployment rate out of 200
ountries
Relatively low inflation rate - inflation never
eached above 5% in the past 10 years
Currently, Korea has a balance of payments
urplus, however likely to have a deficit
Korea plans to focus on decreasing the inflation rate and
government debt.
Challenges:
-Increase in oil/raw material prices is a threat to Korean
economy’s growth. Korea does not have many raw
materials (including land, petrol, metals, population..etc.),
and import plays an essential role in development of
Korean economy - growth is dependent on labor and
exports to foreign markets. Since Korea lacks raw
materials, it must import goods and manufacture the
imported goods.
-Eurozone crisis - decrease in demand for exports
-rapidly aging population, and decrease in fertility rate.
This would be a major challenge to Korea’s economy
since this will result in decrease of labor force.
Generally: rapidly aging population, inflexible labor
market, over-dependence on manufacturing then
exporting goods to foreign market. (Korean economy is
currently too dependent on exports to drive its growth)
Summary &
Conclusion
Korea’s economic growth will be hindered - however will keep expanding for several
more years. It is likely that Korea will keep being the leading country in IT and
manufacturing and its economic growth will continue to base on manufacturing,
service and exports.
It is predicted that Korea’s economy will expand to having 11th largest GDP in the
world by 2020.
HOWEVER, due to the lack of
raw materials, it is likely that
Korea’s GDP will be surpassed
by countries with more FoP in
2050 (e.g. Indonesia, Nigeria)
Korea is using its FoP quite effectively, and its economy is close to the PPF curve.
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http://euromonitor.typepad.com/files/gdp-rank-final.pdf
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