When You Don’t Address the Issues, You Get…Band-Aids

Better Than Nothing, But No Actual Solution
This morning, this article appeared on the Yonhap News website. There are many things that the Korean government can do. Depending on your political beliefs, they range from additional government spending to a reduction in the various taxes that exist on consumer goods. Most likely, the measures need to be related to a reduction in consumption taxes or temporary relief on income taxes. Let’s be clear though: there is no quick fix here. Actually addressing the problems have been the topic of many posts on this blog.

External Factors Loom
Some of the factors originate outside Korea’s borders. Rising oil prices, Middle East domestic strife, European debt problems: these are just a few. The increased influence being exerted on the global economy by China and India is not necessarily helping matters. Approximately 2.5 billion people, many of them younger than the average Korean, are the new source of demand for commodity products such as energy, and oh yes, food.

Korea’s Structural Deficiencies
Internally, Korea’s economy has structural problems. Some of them are behavioral. While the average foreign English teacher views the ajumma crowd as a money-saving lot, native Koreans know better. Simply go to a Gangnam street on a Sunday afternoon. The streets are FULL of cars, each of which uses gasoline that costs many, many time more than gasoline in the United States. Where are these cars actually going? Nowhere: the streets are too full to get anywhere fast. Add in the cost of tony imports, and what do you get? Rising household debts, and a near-zero savings rate.
Real estate prices are a huge problem. The fact is that the suspicion of the stock markets, chaebol, and the Korean government, have combined into an unsavory combination that has left Koreans with only one real, tangible investment alternative. Real estate. Well, that is fine as long as there is another buyer of real estate. Oops. An aging economy, a huge amount of empty real estate projects outside of Seoul, and ever-changing tax legislation regarding real estate transactions have combined to make Korea’s residential real estate market lag far, far behind other asset classes. This is made much worse by the simple fact that a very high percentage of a Korean family entire net worth is invested in an apartment. This is gradually changing, as the mathematics of the jeonse and weolse system are making the rental markets seem to be bargains when compared to purchase prices. The flip side? The owners of real estate are seeing their net worth decline, with no end in sight. When the largest component of your net worth is declining, it is difficult to be optimistic about your financial prospects.

The Bank of Korea: Welcome to the Rock and a Hard Place
This blog has pointed this out on a number of occasions: the Bank of Korea is in an almost-untenable position. Raising interest rates will push down real estate prices. Leaving interest rates the same will expose Korea to increasing inflation. Both choices will result in lower consumer spending, i.e. just what the Blue House wants to avoid.

No Silver Bullet
The list is actually much longer than mentioned, but it is clear that if you have a lower sense of net worth, and rising debts, a consumer would be less likely to feel comfortable about spending. When you add in the external factors, it is really quite simple. Everyday Koreans have every right to feel stressed and nervous about their everyday living expenses. To foreigners, this may seem incredible, but it is a fact that everyday Koreans have not enjoyed the same increase in earnings or wealth that Korean corporations have. This is the case in many countries around the world. While many famous foreign publications may point out Korea’s great successes on the international stage, the employees, i.e. everyday Koreans, are not enjoying the fruits of these triumphs.
Now, the Blue House has been pressed into action (maybe). Last month, President Lee called for suggestions to stimulate domestic demand. It will be interesting indeed to watch this, because of the very different economic theories that exist regarding this topic. Perhaps increased government spending on projects is the solution. Doubtful, as a great number of these projects have already been used to maintain Korea’s economy to this point. Perhaps temporary changes to the tax code are in order. This seems to be the last bastion of hope, but tax breaks will subject the government to criticism by those that suggest that Korea is already a very bifurcated society where the rich get richer, and the poor get poorer. In short, any “solutions” will likely be temporary, until longer-lasting solutions to Korea’s structural and attitudinal issues are addressed. No wonder there is so much surfing on the internet in Korea; in cyberspace, there are no such deficiencies, there is only economic equality, without bias or historical burdens to address.