The Bank of Korea announced on March 5 that Korea’s per capita gross national income or GNI increased 5.4 percent to reach 31,349 dollars last year. A country with 30-thousand dollars in per capita GNI is largely considered as an advanced economy. Here is Choi Bae-geun, professor of economics at Konkuk University, to discuss the implications of Korea’s achievement and potential tasks to contend with ahead.
South Korea’s per capita GNI was only 67 dollars in 1953, as the country emerged from the destruction of the Korean War. It took Korea more than 40 years to raise its per capita GNI to 10-thousand dollars in 1994. 12 years later, in 2006 under the Roh Moo-hyun government, the figure passed 20-thousand dollars. And it took another 12 years to surpass the 30-thousand dollar mark. It’s an impressive feat, particularly when considers other countries in the group, such as the U.K. The first country to industrialize, it nevertheless took 200 years for it to reach just 10-thousand dollars in per capita GNI. Considering this timeframe, Korea’s achievement is all the more remarkable.
Following the armistice that effectively ended the Korean War in 1953, South Korea was one of the poorest countries in the world. Initially, growth was slow, as the beleaguered economy clawed its way out of one of the most destructive conflicts in the 20th century. It took 24 years until per capita GNI exceeded 1,000 dollars for the first time in 1977.
But Korea soon experienced remarkably high and sustained economic growth, described by some as the Miracle on the Han River. Its per capita GNI reached the 10-thousand dollar mark in 1994, the 20-thousand dollar threshold in 2006 and the 30-thousand dollar milestone in 2018.
Among OECD member states, Korea has become the 22nd country to break the 30-thousand dollar mark. But it is only the seventh country to do so with a population of 50 million or more.
The other six countries with populations above 50 million and per capita income over 30-thousand dollars are the U.S., France, Britain, Germany, Japan and Italy, all of whom are members of the G7 group of nations. Among the G7 economies, Canada is excluded from the so-called 30-50 club, as its population is under 50 million. Last year, Korea became the seventh member of this club of economic powerhouses. In fact, 30-thousand dollars multiplied by its population of 52 million surpass 1.5 trillion dollars.
Korea’s entry into the 30-50 club is an indicator that the nation has joined the ranks of advanced economies, just 65 years after the Korean War. However, despite the outstanding achievement, it may be too early to pop the champagne. Economic growth and higher per capita income aren’t really being felt by the general public in Korea.
Some 40 to 50 percent of Korean households have actually seen their real incomes decrease amidst recent economic conditions. It means many middle class households are shifting towards low-income classification, and previous low-income households are falling to the poor household bracket. To put it differently, the national economy may grow but many in Korea aren’t feeling it, particularly in their incomes. While the disposable income of the upper 10 to 20 percent has increased, that of the bottom 18 to 25 percent has decreased. Korea has to confront its growing income inequality.
Per capita GNI includes public and private sector income as well as that of households. Most in Korea feel few, if any, positive changes from higher per capita income due to growing income inequality. In the fourth quarter of last year, nominal monthly income among households in the bottom 20 percent fell 17.5 percent year-on-year. In contrast, monthly income of the top 20 percent increased 10.4 percent on-year. Indeed, a majority don’t really feel they are better off than before, with the benefits of growth concentrated at the top.
On another negative note, small and mid-sized firms have seen a decline in profitability, which is already less than half of that of large companies. The growth of large businesses certainly helped Korea hit the 30-50 mark, but their success has not risen the tide for all boats. To make matters worse, the country’s economic outlook for this year is looking rather bleak.
The global economy is slowing rapidly, raising concerns of a recession. Last year, exports and household consumption led Korea’s economic growth, with corporate investment shrinking. As the export environment is expected to deteriorate in 2019, Korea may lean more on household consumption. But it is hard to expect disposable income in this space to rise dramatically, despite the Moon Jae-in government’s income-led growth initiative. Thus, Korea’s economic growth is feared to decelerate this year.
It is certainly good news that Korea’s per capita GNI has exceeded 30-thousand dollars. But it is premature to celebrate this achievement when one weighs it against unfavorable internal and external factors.
Korea posted real gross domestic product or GDP growth of 2.7 percent in 2018, falling below 3 percent for the second straight year. Exports, which had remained robust, have been falling for three straight months. This is due in part to a decline in semiconductor shipments which have dropped more than 24 percent due to oversupply and falling prices. Reflecting the grim reality, Moody’s Investors Service has lowered its growth outlook for Korea this year to just 2.1 percent.
Indeed, Korea may slip below the 30-thousand dollar per capita income mark unless the situation improves. Looking abroad, there is historical precedent for such a change in fortune. Spain passed the 30-thousand dollar mark earlier than Korea, but a financial crisis pushed that all the way down to some 20-thousand dollars. The Japanese economy began to lose steam in the early 1990s shortly after it achieved per capita income of 30-thousand dollars and its economy has more or less been stagnant ever since.
Some countries that hit the 30-thousand dollar threshold failed to properly cope with the downside effects. They executed certain growth plans and strategies before reaching the milestone, but unsettled problems dragged their economies down. Korea may experience the same.
At present, Korea with soaring household debt, a serious problem closely related to the real estate market. This reminds us of what Japan was like 30 years ago. Korea should learn a lesson from Japan and take appropriate action. The scale of domestic demand in Korea has expanded considerably, but household consumption is not as brisk as that of developed countries, due to stagnant household income growth.
For sustainable economic development, domestic demand should remain strong. To that end, household fiscal health should be improved. Policies aimed at increasing household income must be implemented consistently so per capita income in Korea continues to grow, moving eventually towards the 40-thousand dollar mark.
Korea’s per capita GNI was able to cross the important threshold of 30-thousand dollars. To keep the positive momentum alive, it is essential to improve economic fundamentals and stimulate private consumption. Once again, Korea may look abroad for ways to ensure positive economic growth. Germany’s economy, for example, has seen sustained growth on the back of robust small-size companies.
The U.S. has exceeded 2 percent growth through innovations in information technology, propelling its per capita GNI to 40-thousand dollars and beyond. Korea may follow the example of these countries by securing new growth engines. At the same time, it should also make efforts to improve the quality of life for all.