Republic of Korea
Briefing Notes for the Launch in Seoul, March 2008
Growth performance and prospects
- Growth in the Republic of Korea was stable in 2007 at 5%. Private consumption continued to grow, having recovered strongly from the bursting of the household credit bubble in 2004. Consumer confidence remained high, with household incomes rising due in part to increased income from the rising stock market, with unemployment in the Republic of Korea at its lowest level since the Asian crisis of 1997.
- GDP growth in the Republic of Korea is forecast to remain unchanged in 2008. The slowdown in the United States will hurt exports, but China will continue to offer opportunities. Exporters will also benefit from the free trade agreement with the United States in 2008, subject to its ratification by the United States Congress. Private consumption will remain strong, having recovered from the bursting of the household credit bubble.
- The major downside risk to the growth forecast comes from the United States subprime crisis. In a worst-case scenario – if the United States economy goes into a recession – the Republic of Korea, Taiwan Province of China, and Singapore would feel the greatest effects, due to their strong export focus.
- In the 2001 United States slowdown, when the economy weakened to 0.8% growth, United States import demand for consumer durables and their associated inputs, machinery and equipment contracted sharply. These goods are among the main exports of the Republic of Korea. Electrical machinery, road vehicles and telecommunication equipment constitute almost 40% of the exports of the Republic of Korea. In 2001, import demand for goods from the Republic of Korea fell by 13%.
- A major United States slowdown could reverberate into other sectors for the Republic of Korea. Financial losses from investments in the United States would further reduce income. Consumption would contract. Possible capital reversals would hit equity markets and exacerbate the situation.
- In the Republic of Korea, inflation accelerated in 2007 due to both rising global energy prices and strong domestic demand. Inflation rose to 2.6% for the year, driven by oil prices, rising utility bills and strong consumer spending. There has been a substantial rise in property prices in some urban areas.
- Price rises in the Republic of Korea were mitigated by the continued appreciation of the won. Inflationary expectations also remained low due to the central bank’s strong policy stance. Inflation for 2007 remained moderate and within the target range of 2.5 to 3%. The Bank of Korea has been aggressive in controlling inflationary pressures. In August 2007 its benchmark overnight interest rate reached 5%, its highest level in six years.
Current and capital account
- Exports from the Republic of Korea remained strong, as China’s growth offset both domestic currency appreciation and weak demand from the United States. Another cushion has been the backlog in shipping.
- High oil prices and strong domestic demand also ensured high merchandise imports to the Republic of Korea, where the services account balance remained negative in 2007 due to outbound tourism and royalty payments on overseas patents. But the income account stayed roughly neutral, as the outflow of profits from Foreign direct investment (FDI) was balanced by the rising stock of domestic residents’ asset holdings abroad.
- The currencies of the region have appreciated dramatically over the last two years on a tide of huge global liquidity. The Korean won rose by 7.3% against the dollar between 2006 and November 2007. Movements in real effective exchange rates, the best measure to gauge competitiveness, however, show that since 2006 the Republic of Korea has not experienced appreciation.
- Korean and other Asia-Pacific investors are playing a key role in supporting developed countries through the recent turmoil. Sovereign wealth funds and State investment institutions from the region have bolstered weakened banking sectors in the United States and Europe. Notable purchases include an equity stake for Korea Investment Corporation and Singapore’s Temasek Holdings in Merrill Lynch.
- Services exports have been a major success for the Republic of Korea. Services, the fastest growing sector in the global economy, account for nearly one-fifth of global trade. In 2006, the top five exporters of transport services in the ESCAP region – the Republic of Korea; Hong Kong, China; China; Singapore; and the Russian Federation – were among the global top 10. Their exports that year amounted to $99 billion, or 16% of the world total.
- Exports of other commercial services, the most dynamic category, grew at an annual average of 13% for the developing ESCAP region between 2000 and 2006. India; Hong Kong, China; China; Singapore; and the Republic of Korea, were among the global top 10 in 2006, exporting $184 billion in that year. However, the exports of the Republic of Korea and Hong Kong, China, grew at or slightly below the world average in 2000-2006, while those of China and Singapore grew above it, at 24% and 19% respectively.
- The Republic of Korea is facing rising inequality due to structural changes in the economy: the high-technology export sector has grown more important in recent years, widening the gap between skilled workers in the export manufacturing sector and less skilled domestic service workers.
- While the region continues to see outflows of people to the developed countries that traditionally admit migrants for permanent settlement, the mobility of people seeking temporary employment within the region has become more important. The Republic of Korea and other relatively prosperous Asian economies have become hubs for temporary migration. Their sustained growth, coupled with low fertility, compelled these economies to seek manpower from neighbouring low-income, labour-surplus countries. Although migration can benefit families, there are concerns about potential costs to family cohesion, marital stability and children left behind.
- Migration to marry a foreign partner, known as “marriage migration”, is on the rise in the region. The Republic of Korea, Japan, and Taiwan Province of China have experienced a dramatic increase in international marriages, mostly involving foreign women and local men. In the Republic of Korea, 14% of all new marriages in 2005 were between a Korean and a foreign spouse. Foreign brides come to those countries mainly from neighbouring developing countries.
- One factor behind the trend of “marriage migration” is the continuing urbanization in high-income economies, coupled with impending depopulation due to low fertility and ageing populations. Many men obligated to take charge of family farms are unable to find brides because local women prefer urban work and lifestyles. In the Republic of Korea, some local governments have joined with farmers to sponsor searches for overseas brides in nearby countries. Obtaining secure and legal residence, including status for work, in the host country was an important factor in international marriages between the Republic of Korea and Thailand.
- The complexities of “marriage migration” are myriad. Brokers and agencies fostering marriage migration have raised concerns over fraudulent marriages and the trafficking of women. Facing restrictive policies, aspiring migrants may use marriage to gain residence in another country. Employers may also use marriage as a recruitment strategy. For receiving societies, foreign spouses and the children of internationally married couples raise questions about settlement, integration and the future of multiculturalism.