Exports; the Jewel of South Korean Economy
South Korea has an export oriented economy and its export accounts
for more than 50% of GDP.
To analyze the current economic environment and economic growth in South
Korea, it may be useful to cite examples on some people’s assumption about
zero inflation. Many people analyzing economic issues using their general
information, praising the advantages of Japan’s past and its export
potentials and the very positive impression Japan economy has left on the
people speak about the benefits of zero inflation as well as zero and
negative interest rates. While all of these figures indicate the recession
and economic problems that have occurred in Japan, they typically occur in
countries where a significant portion of their GDP is dependent on exports.
The same line of thinking seems to exist in some media. Some media in Iran
assess positively the decline in Korean inflation to zero point, but is this
really a favorable economic phenomenon? Will the slowdown in inflation,
which is predicted to be negative for a short time, benefit the economy and
lead to economic growth in the country?
Prices in South Korea have not changed since August last year. Prices of
food and non-alcoholic beverages declined by 4.1 percent in September,
faster than a 3.3 percent decrease in the prior month. It was the second
yearly fall in the sub-index since July 2016 and the steepest since February
1987, amid a slump in cost of fresh foods (-15.3 percent vs. -13.9 percent
in August), namely vegetables (-21.4 percent vs. -17.9 percent).
Meanwhile, prices decreased less for transportation (-1.6 percent vs. -1.9
percent); and communication (-1.8 percent vs. -2.2 percent) and rose at a
faster pace for health (1.1 percent vs. 0.9 percent); and alcoholic
beverages & tobacco (1.1 percent vs. 0.8 percent).
While low inflation indicates macroeconomic stability, the decline in
inflation in Korea does not reflect stability.
The decline in inflation in Korea is primarily attributable to the projected
economic downturn expected in early 2019. Also lower inflation and lower
risk-free interest rates of about two percent is the main reason for the
decline in exports that happened because of overall lower demand in Korea.
Whenever inflation in Japan was below zero percent, it’s exports
also declined during the same period.
Exports from South Korea plunged 11.7 percent year-on-year to USD 44.70
billion in September 2019, worse than market expectations of 11.2 percent
fall and following an upwardly revised 13.8 percent drop in the prior month.
This marked the tenth straight month of yearly decline in overseas sales,
amid deteriorating external conditions, including the US-China trade
dispute. Exports of semiconductors and petrochemicals decreased while those
of automobiles, ships, and bio-health products increased. Among major trade
partners, exports to China went down 21.8 percent; those to the US dropped
2.2 percent; and to Japan fell 5.9 percent.
South Korea has an export oriented economy and its export accounts for more
than 50% of GDP. The country exports mainly machinery and transport
equipment (59 percent of total exports) such as: electrical machinery,
apparatus, appliances and electrical parts (18 percent); road vehicles (13
percent); telecommunications, sound recording; reproducing apparatus and
equipment (8 percent). Other exports include: petroleum, petroleum products,
related materials (6 percent); iron, steel (4 percent) and plastics (4
percent). Major export partners are China (26 percent of total exports), the
United States (13 percent) Hong Kong (6 percent), Vietnam, Japan (5 percent
each) and Singapore (3 percent).
Integrated circuits / microassemblies are the highest value export products
in Korea, valued at $ 109.8 billion in 2018. For example, Samsung and SK
Hynix account for 70% of the global market share of available dynamic memory
The Bank of Korea predicts that inflation will remain below zero for some
time. In the case of negative inflation and financial markets, the price
(opportunity cost) of holding money is the amount of profit that can be made
if it is converted into another financial asset. Financial gains include
three risk-free interest rates, risk coverage and inflation. We should know
that eliminating inflation or negative inflation reduces the cost of keeping
money. While money is the most liquid asset possible and can be used
directly in transactions, we must also reduce the interest rate without
Another point to consider is that the risk coverage of financial assets may
be lower than the risk assessed by investors due to trade war and probable
These issues ultimately lead to the justification and attraction of lowered
inflation for holding money against financial assets such as stocks or other
investment items, which would cause a further recession as the investment
If you take a look at Bank of Korea’s statements, the bank’s target for 2019
is to achieve a 2% inflation rate. The bank has kept interest rates at 1.5%
in its meetings. The reason is that the pace of domestic economic growth in
Korea is slow, and uncertainties have been raised about predicting the path
of growth. The reason for these uncertainties is the increase in trade
disputes between the United States and China. For this reason, the bank has
said that it will make the next decisions in light of current events and a
careful review of macroeconomic conditions.
The Bank of Korea also said in a statement that as inflation dropped to
zero, it would reduce the price of petroleum products and agricultural
products, livestock and fisheries. Given the foregoing, inflation is
projected to fall below zero for some time, then to rise next year and to
increase by one percent from its lowest level.
A look at the recession in Japan shows that the country is in recession with
a sharp decline in inflation and a decline in its export power.
Whenever inflation in Japan was below zero percent, it’s exports also
declined during the same period. This means that the inability of the
monetary and financial arm of the country to withstand the recession has
caused great instability in the country. Between 2007 and 2010, when exports
fell sharply, we saw a sharp decline in inflation. Also, in 2013 and 2016,
when there is a decline in exports, we see inflation below zero. The Bank of
Japan maintained its short-term interest rate unchanged at 0.1 percent in
June. Policymakers in the country also said they would take remedial
measures if the bank fails to meet the two-percent inflation target set. The
average interest rate in Japan was 2.76 percent from 1972 to 2019, reaching
a negative 0.1 percent in January 2016, and so far.
We should not
confuse ‘forms’ and ‘functions’ with each other in economics. Economics is a
universal science. We should know that in function the aim is to create
macroeconomic stability, but in terms of form, low inflation with little
fluctuations indicate macroeconomic stability. As shown, it should be noted
that recent events in Korea and inflation near zero or negative indicate
macro instability and the inability of Korea’s monetary and financial arm to
cope with the recession. And the origin of the recession has also been a
negative global shock to demand for Korean exports.