A Bubble Waiting to Burst? : S. Korean Salaries Growing at Too Fast a Pace, Many Fear
Daewoo Electronics Co. has achieved a small but significant milestone in South Korea’s drive to join the ranks of the world’s advanced industrial nations.
Its South Korean workers now earn more than their counterparts in some of Daewoo’s Western factories. For example, workers at a Daewoo videocassette recorder factory in Kumi, South Korea, now draw average salaries of $1,300 per month, while employees of a similar Daewoo VCR plant in Northern Ireland average $1,200 per month, according to Bae Soon Hoon, president of Daewoo Electronics. The workers at Kumi, unlike their Irish counterparts, also get a free lunch.
Thanks to the rapidly rising wages paid by Korean employers such as Daewoo, free-spending workers are helping to fuel a booming economy here. After a slowdown in 1992 and 1993, gross domestic product is expected to grow by more than 8% this year.
Times are good indeed, but they may be too good for some Koreans who worry that South Korea is headed for a crash.
Wages are rising too fast and outpacing increases in production, says Bae, a situation that is a “time bomb” threatening to undermine South Korea’s international competitiveness. He notes that while South Korean wages have caught up with Northern Ireland’s, Britain’s per-capita GDP is still about 2.5 times greater than South Korea’s.
South Korea could be caught in a bubble of expanding wages and consumption that cannot be sustained by the country’s fundamental economic strength, leading eventually to a collapse that would bankrupt some companies and bring a jump in unemployment, said Bae, adding, “I hope that will not happen, but it can.”
The current boom was ignited by government steps to encourage corporate investment, plus the effect of a strong Japanese yen, which makes South Korean products relative bargains compared to competing goods from Japan. Inflation is running at a tolerable 6%, while wages are up an average of 7% and unemployment is down to just 2.2%. South Korea’s 1993 GNP of $329 billion made it the 14th largest economy in the world, and it is still headed up fast.
“Shipbuilding, automobiles, semiconductors, chemicals--these industries have been doing well in the domestic market and also in exports, whereas textiles in general, footwear, clothing, these kinds of things are doing relatively poorly,” said Yoo Jung Ho, a scholar working with the South Korean government’s Economic Planning Board. “This isn’t really surprising, because the industries doing well are relatively capital intensive with a higher level of technology, whereas clothing and footwear are labor-intensive.”
Consumer spending, Bae said, has seen “steady growth from last year, although everything became more luxurious. The bigger cars are selling well, the bigger refrigerators are selling well.” But this has him worried too: “Consumers should recognize this is too big for our economy . . . . I wonder when the adjustment is coming.”
Others in South Korea argue that the economy is already making adjustments that will address the concerns raised by Bae.
With its labor cost advantage gone, the nation is attempting to take advantage of the current prosperity to develop technology- driven industries that will help it remain competitive with other nations.
The quasi-governmental Committee on High-Tech Industries, in a report last month to the Ministry of Trade, Industry and Energy, predicted that by 2005, South Korean firms could hold 5.5% of the global market in a variety of fast-growing high-tech industries.
High-technology industries such as semiconductors, liquid crystal displays, industrial robotics and optoelectronics are expected to increase production by 18% or more each year, the report said.
If these growth rates are achieved, South Korean high-technology production in 2005 would be valued at about $330 billion, or 3.5 times this year’s total exports of $93 billion, the report said.
Achieving these goals will require heavy corporate investment, but big firms seem willing. Hyundai Electronics Industries Co., for example, has devoted 13% of its semiconductor revenue to research and development, said Chang Hong Jo, senior vice president in charge of semiconductor research.
Corporations and the government are serious about achieving the targets set out in the high-technology report, said Lee Youn Ho, a scholar at the Lucky-Goldstar Economic Research Institute. “We have to do it. Without achieving this kind of target, we will be a less-developed country forever.”
South Korean firms are already having dramatic success in upgrading their factories, according to a recent report by Baring Securities in Tokyo.
South Korea’s 30 largest business groups will invest nearly $19 billion in improving factories in the second half of 1994, up 77% from the same period of last year, the report added.
By contrast, Japanese firms are struggling just to restore profits after a long recession, the report noted, adding: “It is hard to avoid the conclusion that, in the years ahead, those Japanese companies who compete head-to-head with the Koreans will be facing as difficult and dangerous an opponent as they themselves were over the past 20 years.”
The picture was quite different just a couple years ago. Korean economic growth, which sometimes ran at double digits in the 1980s, fell to 4.7% in 1992, the worst performance since 1980. Then in late 1992, longtime opposition leader Kim Young Sam was elected president. Despite his popularity with voters, business leaders were worried about his policies, and the economic slowdown lingered on for months after he took office in February, 1993.
The turnaround came last year when Kim invited about 30 top business leaders to one-on-one private meetings at his official residence--the Blue House--to assure them that the government would support the economy and the private sector, said Lee, the Lucky-Goldstar scholar.
“He met the owners of the big conglomerates and big companies face-to-face . . . and asked them to invest actively,” Lee said.
Those meetings, Korean executives said, gave businesses the assurance and confidence to move ahead with investments that would stimulate the economy.
Times researcher Chi Jung Nam in Seoul contributed to this report.
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Booming Economy
A high level of consumption by South Koreans has helped fuel rapid economic growth for the country since 1981. South Korea’s gross domestic product, percentage change from previous year:
‘94*: 8.2%
* Estimate
Source: Government of South Korea
