South Korea's economic mirage

Manufacturing powerhouse could be heading for a financial fall, McKinsey warns.

Let them eat pizza. McKinsey warns of a middle class squeeze in South Korea. Above, Seoul's Myeongdong commercial district.


South Korea and its amazing decades-long surge into an economic powerhouse could be heading for a fall for pure economic reasons, warns consulting company McKinsey.

Although GDP has tripled in the last 20 years with the boom in manufacturing and export of electronics and cars, many of the jobs have gone overseas, McKinsey Global Institute writes on it website.

Compounding the problem:

  • many South Koreans are "cashflow constrained" by housing prices
  • personal savings rates are in free fall
  • the birth rate is low

McKinsey points out that South Koreans spend 7.7 percent times their median annual income on the median price of home, which is twice the U.S. multiple. Spending on private education is a whopping 9 percent of GDP, as parents obsess on sending their kids to a good school. Yet often the expensively educated graduates do not have jobs, McKinsey notes.

Summarizing its report Beyond Korean Style: Shaping a new growth formula, McKinsey writes:

"South Korea became the first nation to go from being a recipient of aid from the Organisation for Economic Co-operation and Development to being a member of its donor committee. South Korea is the leading supplier of LCD screens, memory chips, and mobile phones and is the world’s number-five automaker. Yet the nation’s GDP growth is increasingly decoupled from the lives of its middle-income citizens."

The consulting giant encourages several measures in its report, including reducing housing payments, ending the "education arms race," building a stronger service sector, and encouraging more small-to-medium enterprises.

Photo from Paul via Wikimedia

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