South Korea’s exports are slowing as global growth cools. That would ordinarily be a cue for the central bank to ease interest rates to support big “chaebol” such as Samsung and Hyundai. Their exports still lead the nation’s GDP, but their factories no longer churn out as many jobs as they used to, at least not ones young Koreans want. Monetary policy may soon get a new orientation.
Korea’s economy is reaching the end of the trail of export-led development. When countries are poor, cheap currencies and low wages support exports, which provide funds for financing national development. But as Japan learned 20 years ago, this eventually leads to an economic cul de sac.
One problem is dwindling job creation. Automation and off-shoring reduce the number of new positions in manufacturing. And many young Koreans don’t relish taking their parents’ spot on an assembly line. While the official unemployment rate is below 3.5 percent, one in five in their 20s is jobless. To absorb them, Korea needs to promote its services sector. A weaker currency provides no help.
But an undervalued currency does lead to chronic inflation. Although the central bank has managed to keep inflation near its three percent target over the past decade, the rate has crept above four percent after two years in which real interest rates have been negative. That helps exporters by weakening the won. It also helps the voters in their 50s, who bear the bulk of household debt, now equivalent to 150 percent of the average disposable income.
Younger Koreans, though, get more pain than gain from the current arrangements. And they are registering their discontent. In last month’s race for Seoul’s mayor, voters below 40 rejected both mainstream parties to elect an inexperienced outsider.
Elections for the National Assembly are due next April, followed by the presidential contest in December. The Bank of Korea may hope inflation falls below the 3.25 percent policy rate before campaigning begins. But it is not immune to political pressure. And for politicians, higher rates, weaker exports and slower growth may be the price of survival.