S. Korean Growth Is Expected to Top Rest of Asia in ’91

Despite a month of political turmoil and violent student protests, South Korea appears ready to regain its top ranking in economic growth among nations on the Pacific Rim.

Although domestic strife has disrupted life in parts of Seoul and, at times, as many as 80 other cities the last month, workers have remained largely aloof and no serious production losses or strikes have been reported.

Meanwhile, the nation is benefiting from strong consumer spending, healthy business investments in equipment and machinery and surging exports in such key products as electronics goods.

Accordingly, the economy will grow by 9.5% this year, the highest rate in three years, the government-owned Korea Development Bank predicted. If that mark is achieved, South Korea would stand shoulder to shoulder with Thailand, where 9% growth is expected.

If the predictions come true, it would not be the first year in which the South Korean economy prospered despite political instability. In 1987, the nation’s worst year of turmoil since the Korean War, the economy grew 12.8%. It followed that performance with a year of 12.4% real growth before falling to 6.7% in 1989.

The latest report’s bullishness was supported by a host of recent developments. Indeed, all signs were pointing toward an overheating of the economy.

Last Thursday, President Roh Tae Woo’s Cabinet approved an average increase of 15% in electric fees for households--and more for businesses. The move, a conservation measure, will take effect June 1.

The action came only a day after the Energy Ministry, fearing brownouts this summer because of surging demand, set up a task force to monitor consumption of electricity. Supply is so tight that the breakdown of a single large power plant might cause brownouts, the ministry said.

On Wednesday, Construction Minister Lee Jin Seol appealed to 22 large business groups to postpone implementation of contracts to ease a pinch in the supply of workers and raw materials, such as cement. Earlier, the government itself moved back schedules for public works.

Although the latest Korean Development Bank announcement appeared to be timed for political effect, it contained no good news on inflation, which has hurt Roh politically.

The development bank’s prediction exceeded by 2.2% the government’s growth forecast for 1991. It foresaw an even better year than last year, when the gross national product expanded by 9%, after subtracting for inflation.

Just eight days ago, the Pacific Economic Cooperation Conference--a private group of businessmen, scholars and government officials promoting Pacific Basin cooperation--predicted that South Korea would top all Pacific Rim countries in its 1991-92 performance, with two-year growth averaging 8.25%, compared to 7.9% for Thailand.

The Pac Rim group, however, underscored Roh’s troubles by predicting that inflation would hit 10% this year and would likely remain high--at 8%--next year as well. Only the Philippines was expected to suffer worse inflation. Japan’s Nomura Research Institute predicted a 1991 consumer price increase of 11% for South Korea because of a “vicious cycle of rising prices and wages.”

In the first three months, consumer prices rose 11.2% compared to the same period a year ago, a pace that appeared to guarantee the arrival of double-digit inflation for the first year since 1981. Last year, consumer prices climbed 9.4%.

Wage contracts have yet to be hammered out at most of South Korea’s manufacturing firms. Employers fear that unions, prompted by the rising consumer prices, might press once again for large pay increases.

Echoing a bullish mood detected in earlier polls and predictions, the development bank predicted that consumer spending would grow 8.7%, investment in equipment would rise 14% and manufacturing investments would gain 18.2% this year. It also sees a significant gain in export growth--with overseas sales of electronics goods, in particular, expanding by 30%.

But continuing steep growth in imports will ensure a second consecutive deficit in current accounts, the total of trade and such non-trade transactions as tourism, insurance and shipping, the bank said. Most imports, however, were factory equipment and raw materials needed for production--items that were expected to help spur growth in the future.

Manufacturers have stepped up spending on equipment to automate their factories, both to cope with rising labor costs and to upgrade the sophistication of their products.

Although partially responsible for inflation, double-digit wage increases that Korean workers received in each of the last four years have helped create a boom in domestic demand and consumer spending.

After a slowdown in expansion that lasted two years, exports were rising by 12.4% through April.

Depreciation of the won , recovery in South Korea’s overseas markets and development of new markets--especially in socialist countries--were credited with the better-than-expected growth in overseas sales.

Especially helpful to exports has been the strengthening of neighboring Japan’s yen, which has gained about 14% in value in the last year against Korea’s currency, thus restoring some of the international competitiveness that South Korean manufacturers had lost.