Two Structural Problems of the Korean Economy Since the Asian Financial Crisis

Abstract

Motivated by observing dramatic changes in the growth rates of the relevant variables such as GDP and domestic demand, this study considers two structural problems that the Korean economy faced after the Asian financial crisis: one is the dampened ripple effects of exports on domestic demand and thus on GDP, and the other is the decrease in the growth of household disposable income. The direct contribution of exports to GDP growth is stable, at 4 percentage points over time. In contrast, the contribution of domestic demand to GDP growth was large before the Asian financial crisis, while it becomes smaller after the crisis. These facts, together with the decline in investment growth, suggest that the channel that generated the ripple effects of export growth appears to have broken after the financial crisis. Two potential reasons for the dampened ripple effect from the export sector are closely related to the change in the investment behaviors of Korea's larger exporting firms before and after the Asian financial crisis. After the Asian financial crisis, both consumption to GDP ratio and the ratio of individual savings to the national disposable income have significantly decreased. These two phenomena are likely to occur simultaneously when household income decreases. Indeed, the downward trends of the growth rates of household disposable income data. It can also be related to the significant increase in the ratio of household debt to the disposable income. In light of these findings, policy makers should develop policies which aim at providing a better environment where small and medium-sized firms can participate in global value chains more actively. Also, policies should be aimed at reducing the use of temporary workers by raising the conversion rate from temporary to permanent employment. In addition, alternative job opportunities which may absorb those self-employed workers should be created.