Photographer: Tomohiro Ohsumi/Bloomberg

Chip Boom Masks Weakness in Korea’s Booming Economy

  • Automation means relatively few share in export boom
  • Economists warn of sector’s outsize role in GDP growth

The semiconductor industry’s role as a driver of South Korea’s economic expansion this year comes with caveats: the booming sector is creating few jobs while masking weakness in other areas of the economy.

Profits at companies like Samsung Electronics Co., the world’s biggest chipmaker, have soared as global demand sent Korea’s semiconductor exports shooting up by 56 percent this year through November. This has fueled capital spending, too, with Samsung announcing 20.4 trillion won ($19 billion) of new investments to expand output. 

As the year comes to an end, South Korea’s economy is set to expand more than 3 percent in 2017, its best performance since 2014. But because chip manufacturing is highly automated, the export boom has created relatively few jobs -- about 1 percent of all new positions during the first six months of the year, according to Bank of Korea data. 

"A sustained boom in the semiconductor industry leads to investment in production facilities, but with little increase in jobs,” said Hong Jun-pyo, a research fellow at Hyundai Research Institute in Seoul. "The industry’s spillover effects in supporting domestic demand and raising overall wages are weak."

That has implications for policy makers at the BOK, according to the state-run Korea Development Institute. Because of a lack of clear improvement in the jobs market, and no strong inflationary pressures, it isn’t yet time to shift to tighter monetary policy, the KDI said in a semiannual report released on Dec. 6. While the BOK raised the benchmark interest rate last month for the first time since 2011, it said policy remains accommodative.

President Moon Jae-in was elected in May promising to become a “jobs president” and to help households earn more. While Korea’s unemployment rate remains relatively low, at 3.6 percent in October, the government is worried about high youth joblessness, a lack of quality jobs and weak wage growth.

Many remain bullish about the outlook for the semiconductor sector in medium term. The Korea Institute for Industrial Economics & Trade forecasts that it will account for an even bigger share of exports next year -- 20 percent. Without semiconductors, the nation’s exports would fall 1.8 percent next year, according to the think tank.

Yet some say the semiconductor sector’s dominance of Korea’s economy poses a risk. Estimates of how long the chip cycle will run vary widely. Morgan Stanley sees it peaking "soon," though Citigroup remains on the bullish side, saying the supply shortage should persist next year. In any case, the downturn in the sector will come eventually.

“Korea’s dependence on the semiconductor industry means that if chip prices face a correction, there is no industry to replace it as a growth engine,” said Jeong Dae-hee, a research fellow at Korea Development Institute in Sejong, South Korea.

— With assistance by Hannah Dormido

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