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South Korea May Catch Japan's Economic Cold

With low growth at home, the chaebol are investing abroad
SeoulPhotograph by SeongJoon Cho/Bloomberg

South Korea is becoming more like Japan, and not in a good way. After years of strong economic growth driven by exports of high-end electronics and cars, the country is edging closer to the deflationary, low-growth trap that Japan has been mired in for decades. Korean consumers, weighed down by household debt and a stagnant property market, are saving rather than spending. Companies are hoarding cash as they face uncertain demand at home and more competition from China. Korea’s population is also aging faster than that of any other country in the Organisation for Economic Co-Operation and Development, with people 65 and older set to account for at least 14 percent of the population by 2017. “The way Korea used to grow can’t continue unless Koreans spend more and companies invest,” says Kim Yong Ok, head of economic policy at the Federation of Korean Industries.

On the surface, the economy looks healthy. The Bank of Korea forecasts growth of 3.8 percent this year. Conglomerates including Samsung Electronics and LG Electronics are gaining ground against Japanese rivals such as Sony and Panasonic in the TV market. Even though the largest conglomerates, known as the chaebol, account for 85 percent of gross domestic product, they employ only 13 percent of the workforce. The other 87 percent of the country’s workers are self-employed or work for small and midsize companies with much slower rates of growth. Factories overseas account for 15 percent of Korean manufacturers’ total production, up from 4 percent a decade ago. Hyundai Motor makes about 40 percent of its vehicles in Korea, down from 60 percent in 2008. In August, Hyundai-controlled Kia Motors unveiled plans to spend $1 billion on its first factory in Mexico.