Korea Marks 20 Years as OECD Member: What do Next 20 Years Hold?
December 14, 2016
This month, Korea celebrates 20 years of membership in the Organisation for Economic Co-operation and Development (OECD), the 35-member forum of mostly high-income countries that helps advance economic sustainability and the market economy. Only the second Asian country to join OECD, it is hard to imagine that just two decades ago, Korea was itself entrenched in poverty and still a recipient of foreign aid. Today, Korea is ranked as the 14th-largest donor country in the world.
Korea’s dramatic success story is well-known and often held as a model for other countries. Set aside the ongoing issue of national unification and the major corruption scandal and impeachment of President Park Geun-hye currently gripping the nation, to outside observers, things seem to be going fairly well. Korea is performing above the OECD average in civic engagement, education and skills, personal security, jobs, and earnings. But domestic headlines in South Korea paint a picture that shows people are clearly worried about the direction of their country, the fourth-largest economy in Asia.
Beyond the President Park scandal, typical headlines on any given day might read: “Household Debt Soars to 90% of GDP,” or “Bank of Korea Slashes its 2017 forecast to 2.8%” (KDI just lowered the projection to 2.4%), or “Fresh Woes for Hyundai Crisis as Exports Plunge by Half,” or “Youth Unemployment Hits New Record.” With headlines like these, it is no wonder why the highly educated South Korean youth population, which faces a tough job market, scores lowest among OECD nations on one other measurement: happiness.
Household debt at highest level in recorded history
When it comes to cost of living versus income level, the Seoul Metropolitan Area, which contains nearly half of Korea’s 50 million population, is one of the world’s most expensive areas to live in. Seoul’s housing prices have skyrocketed 360 percent in the last 30 years. The city’s price-to-income ratio (PIR) of 16.64 percent is larger than other major cities such as Vancouver and San Francisco, with an average Korean needing to save all their income for almost 17 years to buy a home. Household debt, now more than $1 trillion, continues to grow at an alarming rate, with an increasing number of households reaching out to savings banks for loans to cover daily living expenses. Worries of a financial crisis may become a reality if the Bank of Korea increases its key interest rate too quickly.
Korean global corporations face uncertainty
Korean global conglomerates are struggling with rising trust, competition, and labor issues. Samsung, one of the country’s most well-known companies, is facing consumer confidence challenges due to a recall and termination of its Galaxy Note 7 phone, which has resulted in nearly $5.3 billion in losses. Hyundai Motors, another major driving force for the Korean economy, is also facing setbacks due to one of its largest-ever labor strikes in September of this year, resulting in a production loss of 117,000 cars, worth more than $2.5 billion, and a costly recall of engines in one of the company’s most popular vehicles, the Sonata. Meanwhile, Hanjin Shipping, once the country’s leading shipping company, has filed for court receivership and is facing near-collapse. Last month, South Korea’s No. 2 bulk carrier, Korea Line Corp., agreed to acquire the troubled shipper’s U.S.-Asia route and other assets, a positive move that would keep one of the world’s best shipping work forces in Korea.
Youth unemployment, aging population, and low birthrate
Korea also faces a number of demographic and domestic challenges, including high youth unemployment, which reached a record 12.5 percent earlier this year; a rapidly aging society, estimated to make up 40.1 percent of the population over 65 by 2060; the highest elderly poverty rate among OECD countries; and an alarmingly low birthrate, currently the lowest among OECD nations. Though promising, it is too early to tell whether the recently passed 2017 budget, the largest in Korea’s history with a significant amount earmarked for the health, welfare, and employment sectors, will help tackle some of these issues.
The need to build a service sector
According to the World Bank, manufacturing accounted for nearly 30 percent of Korea’s GDP in 2015, while the service sector constituted 60 percent, a rate that lags behind other advanced economies. As the manufacturing sector declines, it is time to create new demands by placing more emphasis on development of the service sector. In fact, the OECD over the years has advised Korea to nurture its service sector as a second growth engine. Although similar opinions have been raised within Korea as well, thick red tape and regulations often make new initiatives difficult to implement.
While the challenges of Korea’s next chapter are no doubt immense, the country has shown before that it can successfully pull through rocky times. It’s time for the country to leverage its talented youth, dedicated workforce, and strong global position to chart a new course.
Dylan Davis is The Asia Foundation’s country representative in Korea and Jongbeom Choi is a program assistant there. The views and opinions expressed here are those of the individual authors and not those of The Asia Foundation or its funders.
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