Having returned from a few weeks in Seoul it’s amazing how an Asian Tiger Economy differs from ours. South Korea’s recent economic history starts after the Korean War where it was poorer than many sub-Saharan African countries to today where it’s part of the G-20 with a per capita over $30,000. Although the economy has had heavy government involvement in the past, they have adopted free market reforms over the last 20 years and I think there a few interesting take-aways that San Diego and California might want to consider.
Overall, South Korea is resource poor and short on land. All the mineral wealth is in North Korea and Communism there has driven that country to abject poverty. South Korea in contrast skipped from the agrarian age to the information age. It has acquired a lot of land internationally for farming and minerals to process into high tech goods. They rely heavily on exports but have a substantial consumer economy of their own. I was surprised to hear that they have a lot of immigrants, even from Africa, that move there because they see Korea as “a land of opportunity.” Right now there economy is hurting a bit because they rely on exports but they are in pretty good shape since their budget is fairly balanced and their debt
is only 33% of GDP. That is real low compared to the US and especially Japan.
When I was over there I talked to a few locals including American ex-pats to see what they think about life in Korea. I asked about Real Estate, Healthcare, and small businesses. Here’s a summary:
REAL ESTATE. The real estate market in South Korea is based off of savings and not borrowing. It’s pretty much impossible to switch to their system in California but it’s interesting how it works. If you rent a place in Korea you have to put down a massive deposit. Easily over $100,000 sometimes three times that or more. People get this money from the families that save up for their kids and its usually a gift when you marry. Now you may wonder “If you have that much for a deposit, why not buy?” Well land is limited there as it is here and $600,000+ apartments are the norm. So usually that large deposit is just a mid-point where you rent until you build up the rest of your payment to buy a house. No mortgage system to borrow from.
The disadvantages of Korea’s system is that some of my mortgage broker friends wouldn’t have a job. But also there is no way to tap equity unless you sell. There are probably a few more but that was the red flag for me.
The advantage though of not paying 38-50% of your take home each month in either rent or a mortgage payment blew my mind. Housing costs are usually the hardest parts of retirement so that’s a plus. Also this means there is a lot
spending power during your working years to invest in their kids’ education, retirement, or other investments. So I can see the pluses and minus in this system compared to ours.
HEALTHCARE. They have state funded healthcare. The people I talked to says that if you have a cold or check up its nice because it’s cheap. But if you want real care like surgeries or cancer treatments you aren’t going to get it. Like I’ve seen in many places with state-run healthcare, it is mediocre at best. If you want quality you have to pay for it. So the wealthy get great health care because they go to the private medical facilities and everyone else get the scraps. Compare that
to the US where the middle class still has access to quality health care although the poor don’t have access except the emergency room. I guess I’m biased but state-run care doesn’t help the middle class and it shows in Korea’s example.
BIG BUSINESS. The “chaebols” are Korea’s conglomerates. They were the engines of growth early on. Much like Japan, they were state backed for the first few decades. That may work when modernize an agrarian economy fast but a big crisis in the 1990s made them see the light and introduce market reforms. These industries still have strong ties to the government but it appears that since these entities primarily compete globally they aren’t doing much different than other
countries. The global market operates on too much government subsidies which is a disadvantage to those that aren’t so I can’t fault Korea for that. It’s possible state subsidies for global companies are actually an effort by governments to gain an edge over other countries economically and not really about being a market place of goods and services. So Korea’s model seems to have corporate welfare for the global conglomerates but domestically it has a strong free market.
SMALL BUSINESS. This is the part that impressed me the most. There isn’t a blue letter sign in the window, but I haven’t gotten sick at any establishments. I was told by locals that if it’s empty don’t go in. Contrast that with the California regulators that put a sign in the window yet I’ve still gotten food poisoning here. Free Markets work.
For franchises, the big US companies are here of course but you also see the small US chains like Smoothie King and ColdStone in Korea. Why? Because the barriers to starting a business are so low compared to the US. Similar to residential real estate market, people use their savings to buy or rent a shop. If you have a shop, you have a business. Of course, some sleep in their own shop which Americans having high expectations of living standards are loathe to do. But this is where the real estate system cuts their overhead by a lot. If they are retired, they use their pension for the basics so everything is pretty much profit when they make a sale. This might be why I see little if any homelessness in Seoul. Besides strong family values of taking care of each other, most families own a shop so there is somewhere for someone to work. This reminded me how Napoleon once derided Britain as “a nation of shopkeepers.” He went on to lose and Britain started the Pax Britannica. The US is no longer a nation of shopkeepers, 20% are employed by the government and less than 10% are self-employed. Maybe there is something to be learned here.
So that was some information I gathered from some locals in Korea. Does anyone have more information on the economy in Korea? What are your thoughts?