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[Editorial] Strengthening the economy

Consumer confidence, service sector key factors

A string of recent figures on income and trade show that the condition of the Korean economy is improving. What should be taken more seriously, however, may be the need highlighted by these figures to boost consumer confidence and change the industry structure, which is heavily tilted toward export-driven manufacturing sectors.

Local financial institutions forecast that Korea’s per capita gross national income will reach a record high of $24,044 this year, up from $22,700 last year, aided by moderate economic growth and the won’s appreciation against the U.S. dollar. The index, which surpassed the $20,000 level for the first time in 2007 by hitting $21,632, fell below the mark in the aftermath of the 2008 global financial crisis, before exceeding this level again in 2010.

The per capita GNI projection followed data released by the national statistics office last week, which showed the average monthly household income grew by 2.9 percent from a year earlier to 4.26 million won ($4,010) in the third quarter. The growth rate, when adjusted for inflation, remained at 1.6 percent.

Household consumption spending amounted to 2.49 million won per month in the July-September period, up 1.1 percent from a year earlier. Adjusted for inflation, however, consumption inched down 0.1 percent, marking the fifth consecutive quarter of year-on-year decline.

The trend of decreasing consumption coupled with the rise in household income indicates consumers remain reluctant to open their purses out of concern about growing economic uncertainty and worries about the future. This sentiment is laid bare by the fact that middle and higher income households have reduced their consumption, with low income families struggling to make ends meet due to rising food prices and housing costs. Income disparity has also widened as disposable income ― earnings minus non-consumption spending such as taxes and interest payments ― for the richest 20 percent of families was 5.05 times higher than that of the poorest 20 percent as of September, up from 4.98 times higher a year earlier.

Separate data released by the Bank of Korea last Friday showed Korea’s terms of trade improved to a four-month high in October, when the country’s exports also rose to a new monthly high of $50.5 billion, as import prices fell at a faster pace than export costs. With this trend expected to go on, Korea’s current account surplus is likely to reach a record $63 billion this year.

The country’s growing dependence on trade, particularly since the global financial crisis, has spawned concerns that it is still vulnerable to changes in external economic conditions. A recent analysis by the central bank showed that the proportion of trade in Korea’s total supply of goods and services amounted to 33.7 percent in 2011, up 0.8 percentage points from the previous year. Manufacturing accounted for 52.2 percent of the country’s industrial structure in 2011, up 2 percentage points from 2010, with the share of services down 1.2 percentage points to 36.5 percent over the cited period.

For the sustained and balanced growth of the Korean economy, it is essential to boost consumer spending and expand service industries. These two tasks appear to be connected.

Consumer confidence will strengthen when households become sure that the economy will continue to grow, creating more well-paying jobs over the long term. Expanding support for the service sector will be an efficient way to increase the country’s growth potential by bolstering domestic demand and raising employment. It is also needed to reduce the risk of relying too much on a small number of big export-oriented manufacturers, given the volatile global economic environment.
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