Korea’s GNI just stopped short of reaching 30,000 US dollars yet again. Last year, the nation’s Gross National Income or GNI reached 27,561 dollars. Since surpassing the 20,000 dollar mark in 2006, it has been unable to break past the 30,000 dollar mark for the past 11 years. Why is it so difficult for the Korean economy to break past the 30,000 dollar GNI barrier? We’ll take a closer look at the reasons and solutions with Joo Won of the Hyundai Research Institute.
The Gross National Income(GNI) per capita is the total domestic and foreign output claimed by residents of a country, divided by the total number of citizens. As of 2016, the figure is $27,561, so it increased around 1.4% from the previous year. Taking a look at Korea’s GNI per capita, it broke $20,000 in 2006 for the first time but decreased to the 10,000 dollar range because of the 2009 global financial crisis. If we don’t consider the external factors, then it has consistently increased in the 20,000 dollar range. But after reaching the higher 20,000 dollar range, the rate of increase slowed. In 2014, the figure was $27,892, then in 2015 it was $27,171, and last year it was $27,561. Statistically speaking, the figure has been stagnant in the $27,000 range for the past three years.
Korea’s GNI per capita surpassed $20,000 in 2006. It even surpassed $28,000 in 2014, but in the following two years since then, it has remained in the $27,000 range. So, for over 10 years, it has been unable to break past the $30,000 mark. Compared to other countries that were able to surpass $30,000, Korea’s current rate is very slow.
Just around 10 years ago, we used to make $20,000 the base point for comparison. But, as the level of income grew around the world, many advanced countries set $30,000 as the base level. It took only 5 years for Japan to go from $20,000 to $30,000; 8 years for Germany and 9 years for the U.S. But the U.K. was a little different. It took the UK 11 years to go from $20,000 to $30,000. This was considered quite slow, but Korea is taking even longer. In the past, domestic institutions and foreign institutions alike forecast Korea’s GNI per capital to surpass $30,000 by around 2018. However, at this rate, it might go beyond 2018.
Currently there are 26 countries around the world that have GNI per capita higher than $30,000. Out of these countries, it took most advanced nations such as the US, UK and Japan from 5 to 11 years to reach $30,000 from $20,000. But Korea is already in its 11th year of remaining in the $20,000 range. That is why there are fears that it is stuck in a middle income trap.
The factor that influences GNI per capita the most is the won to dollar exchange rate. The average exchange rate for 2016 was 1160.4 won to the dollar, with the won depreciating against the dollar by 2.6% compared to 2015. When the won is strong the GNI per capita goes up, but when it’s weak it tends to go down. Population growth is another important factor. According to the national census, the population estimate increased. That, in turn, made the denominator bigger and brought about a decrease in the GNI per capita. Of course, the foreign exchange rate and population are key factors, but above all, we can’t leave out the fact that the Korean economy has entered an extended period of low-growth. The nation’s rate of economic growth which is an indicator for real GDP growth was 2.8%, remaining in the 2% range for two consecutive years. However, real GNI grew 4%, remaining below 2015’s rate of 6.5%.
The biggest reason why the nation’s GNI per capita is at a standstill is because of the low economic growth rate. Korea’s economic growth rate only reached 2.8% in 2016 and it has been unable to break out of the 2% low-growth range for the past five years with only 2014 as an exception. What is even more worrisome is that the growth rate does not translate into an increase in household income. The figure of $30,000 GNI per capita itself is not that important. What is important is what the figure symbolizes, which is a continuously growing economy. That is why there are constant rumors of crises for Korea which has $30,000 GNI per capita in sight but has been unable to break past the barrier for the past 11 years. Because of various internal and external factors this month, there are fears that a crisis could occur in April.
The April crisis theory is based on the fact that this is when Daewoo Shipbuilding and Marine’s debt is due in their restructuring process, but the government recently announced aid measures so fears have subsided. However, as the US raised its key interest rate, Korea’s market interest rate has been increasing as well and that could be a negative influence on household debt. Also, starting in April the US Administration will submit a report on an audit of their trading partners’ foreign exchange markets to Congress. This report is important because some countries, for example, China or even Japan and Korea could be listed as countries who manipulate their foreign exchange. This could potentially be a great threat to Korean exports. Other concerning issues are renegotiations for the KORUS FTA that’s being brought up since Trump took office, China’s economic retaliation for the deployment of THAAD on Korean soil, North Korea’s missile provocations and the instability in Korea’s political landscape. If these factors all come together and occur at once in April, an economic crisis could be imminent.
One of the most unfavorable factors representing the April Crisis Theory is Daewoo Shipbuilding and Marine Engineering court receivership. However, as we have just heard, the government has clear plans for providing additional aid, so analysts say it is unlikely to lead to crisis. Another potential danger is Korea’s possible designation as a foreign exchange manipulating country by the Trump Administration. But, the chances are not very high and the administration is only likely to use it to apply pressure during trade negotiations. China’s economic retaliation against the deployment of THAAD, the possibility of North Korea’s missile launches and the unstable domestic political landscape have so far been unable to seriously affect the Korean stock market. Therefore, April’s crisis theory is likely to remain only a theory. Even so, as it is certain that the Korean economy is in a low-growth phase, fundamental solutions must be sought out.
Whenever Korea faced a low-growth phase, there were opportunities that helped the nation overcome the difficulties. For example, in the late 90s when Korea faced the Asian Financial Crisis, the new IT industry came to the rescue while the Chinese market opened up, greatly expanding Korean exports. We need opportunities like that right now. Currently, technologies related to the 4th industrial revolution and high-technology industries are being mentioned as new growth engines. On one hand, the private sector must jump into the market with an adventurous spirit and work hard to increase technological competitiveness. On the other hand, the government should focus on what kind of industrial infrastructure is needed for the 4th industrial revolution and work on that. We were able to advance as an IT powerhouse in the late 90s because the government established communication networks and other infrastructure in time for the developments.
For the national income to increase, the economy must grow. For the Korean economy to grow, the decisive factor will be to see how quickly it will be able to establish the basic building blocks, the new growth engines for economic growth.