June 28, 2015    3 minute read

The Economic Hurdles of South Korea

   June 28, 2015    3 minute read

The Economic Hurdles of South Korea

A country noteworthy of innovation and political stability, South Korea has enjoyed spectacular economic growth over the past five decades. However, now, its economy is experiencing a downturn; the result of a concoction of events, which include the spread of MERS (Middle East Respiratory Syndrome) and fraying ties with Japan.

As of 25th June, MERS has claimed 31 lives in South Korea. One of the biggest casualties of MERS is the South Korean economy. Its retailing sector is experiencing a fall in sales volumes as tourists and domestic consumers are driven away by the fear of infection. According to official data, there has been an approximate fall of 24 percent in tourists coming to South Korea. Even locals avoid crowded places, causing the economy’s tertiary sector to suffer loses and hence, lower South Korea’s Gross Domestic Product (GDP). It is estimated that the spread of MERS may dampen 2015 growth to around 2 to 3 percent and expose the economy to deflation.

Aside from MERS, South Korea has another major issue to address: fraying ties with its long-time trading partner, Japan. South Korea’s export industries make up around 50 percent of its GDP. Since South Korea joined the China-led Asian Infrastructure Investment Bank (AIIB), its bilateral ties with the land of the rising sun have been negatively affected. This has resulted in falling export revenues, further hampering South Korea’s economic growth.

The question now is, if South Korea would action appropriately to leap ahead of such economic hurdles. Current negotiations and upcoming policies do indicate a brighter future for the economy. To rekindle consumer demand that has been dampened by MERS, South Korea is planning to introduce a large stimulus package. Should the fiscal stimulus be implemented successfully, the rise in consumer spending and investor confidence will increase consumption and investment in the economy, propping up economic growth figures.

South Korea is also currently establishing stronger ties with China to recover its export sector. On the 1st of June 2015, China and South Korea signed a bilateral free trade agreement, signalling a positive move towards a stronger relationship between the two Asian giants.

Moreover, recently, President Park Geun-hye has been pushing for the formation of new start-ups to reduce the economy’s reliance on chaebols such as Samsung and Hyundai. Such an aim for a creative economy will help diversify the South Korean economy and increase competitiveness in highly monopolised industries.

To sum up, South Korea seems to be playing its cards well to overcome the economic hurdles in its way. However, its plans and policies are not risk-free. By getting closer to China, its relationship with Japan is bound to get worse, maybe worse enough to foil the recovery of its exports. By introducing fiscal stimulus in the face of weak global economic growth, it may not achieve the growth expected. Lastly, by encouraging competition within the economy, it may give way to inefficient firms and diseconomies of scale for the chaebols. A delicate game of balance indeed, making South Korea a must-watch economy in the near future.

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