S. Koreans’ Frugal Ways May Backfire

Everyone applauded South Koreans’ patriotism, discipline and moral resolve when they began shunning restaurants, scrapping travel plans, driving less, patronizing swap meets instead of department stores, turning off lights and heat, doing their drinking at home.

Soon the clapping may stop.

South Korea’s economic report card for January is just in, and the country gets straight A’s for frugality. But some say all the scrimping--in a nation with one of the world’s highest savings rates--may further choke an economy that is already swan-diving into recession.

Retail and wholesale sales fell 8.7% in January, the biggest plunge since 1982. Consumer goods shipments dropped 18.6%, the result of a burst of austerity inspired by the International Monetary Fund, or IMF. Overall industrial output dropped 10.3%--the worst performance since 1954--but even so, inventories rose 1.2%, the National Statistical Office said.

“If this continues, the economy will go into a coma,” said Milton S. Kim, president and CEO of Ssangyong Securities & Investment Co.

Electricity consumption, a leading indicator of economic activity, dropped 2.1% in January compared with a year earlier, according to the Korea Electricity & Power Co. “This is the first time since 1961 that January consumption is down,” a company spokesman said.

Small businesses sensitive to consumer whims--including restaurants, bars and travel agencies--are expected to be overrepresented among the thousands of businesses that will go bankrupt this year. The unemployment rate in January leaped to 4.5%.

Cheap is certainly chic in South Korea these days. Newspapers run articles lauding people who ride their bicycles to work, and lunch hour brings a noticeable increase in the number of well-dressed Korean yuppies grazing on boiled snacks at street stalls where a meal costs less than $2 in won, the nation’s currency.

Desperate merchants are catering to the public mood with ads touting “IMF” sales. “IMF” in Korean has become a synonym for inexpensive.

“IMF Kabli, 10,000 Won Per Person,” hawks a sign for a favorite beef dish that at $6 is perhaps a fifth of the pre-crisis price. Others are flogging “IMF Wedding Gowns,” an “IMF price” on photo processing and “IMF Ban Getang,” a pun on the name for a ginseng chicken dish (san getang) that means the serving will be half-sized.

South Korea’s super-rich, of course, are still spending money. While overall sales are down, sales of some luxury goods are recovering after a three-month decline, according to the Korea Times, which said Chanel sales at the swanky Lotte Department Store have risen sharply so far this year. However, visitors from Japan, Taiwan and Hong Kong, and traders from Russia, appear to be doing much of the buying, taking advantage of a currency that has lost about half its value since last summer.

The tycoons and their families seem acutely aware that ostentatious spending at a time of national crisis would invite attack. Imported luxury cars are garaged.

For the growing ranks of the poor, nothing is cheap enough to warrant a splurge--not even, it seems, a new pair of socks.

That’s why Kim Byong Chol, director of South Korea’s fourth-largest sock manufacturer, is hanging on by his toes. Sales of his socks are down 40% compared with a year ago, while the cost of imported thread is up sharply. So far, his A Ju Socks Co. has avoided firing any of its 120 workers, but it has slashed their bonuses by 40%, cut production 20% and even switched to cheaper boxes for packaging its wares.

Kim is giving serious thought these days to the question of how long it will take South Koreans to wear through the stockpiles in their sock drawers. His answer: a year.

He surveyed his own home recently and discovered that his family had enough clothes to last five years. “It means we used to spend too much unnecessarily,” Kim said. “That is, we used to throw them out while there was still life left in them. . . . It was a bubble.”

Kim does not fault his fellow citizens for their thrift, but South Korean and foreign financial experts are growing worried.

“It’s a very admirable response in some ways, because it says a lot about the spirit and determination of the Korean people, but they already had a very high savings rate,” said a senior American diplomat.

A recent report by SBC Warburg Dillon Read estimated that gross national savings will fall from 34.5% in 1997 to 30.4% this year as strapped consumers have less income to sock away.

“Too much frugality in this situation is too much of a good thing, but I don’t want to trumpet it in the streets” because the South Korean public views this iron-willed restraint as an unmitigated virtue, the U.S. diplomat said.

Given the unrelentingly gloomy prognosis, consumers can hardly be faulted for slamming their wallets shut. Per capita income is projected to fall from $10,548 to about $6,600 this year.

The 4.5% jobless rate in January was up from 2.1% in October and a point higher than originally forecast.

Labor leader Kwon Young Gil, a minor-party candidate in December’s presidential election, said Friday that a private survey by unions found that the rate was 10.9% late last year. He believes that 2 million people may be thrown out of work and onto the mercy of their families, since South Korea has no safety net to cushion them.

The discrepancy in unemployment statistics may be due to South Korean sampling, which counts as employed anyone who works two hours a week, massively underestimating the problem, said Park Young Ki, director of the Institute for Labor and Management at Sogang University.

But Seoul residents need only take a walk to draw their own conclusions: Since last fall, there has been a noticeable increase in the number of homeless people living in the subway, including young men.

A recent survey by the Ministry of Health and Social Affairs found an estimated 2,000 homeless people in the capital. Some have no place to live, while others are dismissed white-collar workers too embarrassed to go home, the Munhwa Ilbo newspaper reported Friday.