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[SeoulMan6]

Opening Their Wallets, Emptying Their Savings
Economists Worry as South Koreans Shift From Thrift to Extravagance

By Blaine Harden
Washington Post Foreign Service
Thursday, July 30, 2009

SEOUL -- In pursuit of middle-class prosperity, South Koreans have looted their household savings like no other people on Earth.

They have collectively binged on private schools and fancy cars, language camps and new apartments, foreign travel and designer shoes.

Americans, the longtime avatars of consumerism gone mad, will save next year at double the rate of South Koreans, according to a report this month from the Organization for Economic Cooperation and Development (OECD), a group that supports sustainable economic growth in developed countries.

When it comes to buying high-priced, brand-name stuff as if there were no tomorrow, Sabina Vaughan concludes that Americans are relative wimps. "Koreans spend more, way more," said Vaughan, 35, who travels to Seoul every summer with her Korean-born mother and spies on her cousins as they shop. "It is a kind of competition for them. It doesn't matter what their income is."

Her conclusion is supported by a mountain of data and a chorus of concerned economists. The household savings rate in South Korea will have plummeted from a world-beating 25.2 percent in 1988 to a projected world low of 3.2 percent in 2010, according to the OECD. Government policies have encouraged borrowing, while Korea's aggressive culture has supercharged spending on signifiers of success, whether they be Ivy League degrees or Louis Vuitton handbags.

"It is not recognized as a virtue to save, not anymore," said Lee Sun-uk, an investment adviser for an office of Samsung Securities that is located in a wealthy neighborhood of Seoul. "To maintain a certain status, people are willing to spend, even if their incomes have declined."

In the past decade, average savings per household have plunged from about $3,300 to $525. On a percentage basis, it is the steepest savings decline in the developed world. Meanwhile, household debt as a percentage of individual disposable income has risen to 140 percent, higher than in the United States (136 percent), according to the Bank of Korea.

The consequences of South Korea's collapsed savings rate are beginning to register in the country's slowing rate of growth, economists said. For nearly 40 years, growth galloped along at between 6 and 8 percent, as banks were flush with household savings that fueled business investment and research. But growth slowed to about 4.5 percent after 2000, when the savings rate dipped below 10 percent.

"The low savings rate is sapping our capacity to grow, and it is going to get worse," said Park Deog-bae, a research fellow who specializes in household finance at the Hyundai Research Institute. "It will lead to credit delinquency. It will cause greater income disparity. It means less resources for our aging population."

As South Korea changed from a war-battered farming society to Asia's fourth-largest economy, its savings rate was almost certain to decline. Economists consider a fall in savings and a rise in consumer spending to be part of the normal development process, as government-backed social services increase, property values rise, and stock markets grow.

But the fall-off-a-cliff character of what has happened with household savings in South Korea strikes many experts as abnormal and worrisome. It is one of several trends suggesting that South Korea, as it wrestles with post-industrial affluence, is a society under extraordinary stress.

South Koreans work more, sleep less and kill themselves at a higher rate than citizens of any other developed country, according to the OECD. They rank first in time spent online and second to last in spending on recreation, and the per capita birthrate scrapes the bottom of world rankings. By 2050, South Korea will be the most aged society in the world, narrowly edging out Japan, according to the OECD.

At the same time, South Korea ranks first in per capita spending on private education, which includes home tutors, cram sessions and English-language courses at home and abroad.

An obsessive pursuit of educational achievement, it seems, is one of the driving forces behind the low savings rate. About 80 percent of all students from elementary age to high school attend after-school cram courses. About 6 percent of the country's gross domestic product is spent on education, more than double the percentage of spending in the United States, Japan or Britain.

"Education is a fixed expenditure for Korean parents, even when household income shrinks," said Oh Moon-suk, executive director at LG Economic Research Institute. "Parents often overspend. It even appears to be leading to a slowdown in the birthrate."

As she plans her family's monthly spending, Lim Ji-young says she makes sure that at least a third of the money is reserved for the education of her 5-year-old son, Roah.

Besides day-care fees, he requires money for books, alphabet tutoring and sports training.

"We want to give our son the opportunity not to be left behind in this society," said Lim, 34, an office administrator in Seoul. "We want to provide him with what other people are providing. To avoid condescension from other people, you want to have the best."

Competitive spending -- on tutors, apartments, imported whiskey and designer handbags -- is a significant factor in the decline of saving in South Korean, according to Park at Hyundai Research.

"Koreans are so much concerned about saving face," Park said. "This is encouraging overspending and it is sometimes irrational."

There are other reasons for the fall in savings that are eminently rational -- and sponsored by the government.

When the economy nearly collapsed a decade ago during the Asian financial crisis, the government made low-cost loans available for the purchase of apartments.

Borrowing exploded, as did housing values, while savings began to evaporate.

"Young households without proper discipline borrowed heavily from banks and on credit cards," said Lee Doo-won, a professor of economics at Yonsei University in Seoul. "They ended up with a huge amount of debt, and the debt trap is still there."

Stagnant incomes and job losses in the current recession have further reduced capacity for savings and have slowed debt repayment.

As important, the spending patterns of aging parents, many of whom have been tapped for loans by children in pursuit of real estate, mean that cash is steadily disappearing from savings accounts.

"Old people do not save," Lee said. "This is a long-term structural phenomenon. It will not change with the business cycle."

Special correspondent Stella Kim contributed to this report.

http://www.washingtonpost.com/wp-dyn/content/article/2009/07/29/AR2009072903191.html?hpid=artslot

[marlow]

Very interesting. I'm glad my wife isn't a brand-name banshee.

The sad thing is that the extra education spending is throwing money in the toilet if the kid doesn't get enough sleep.

[earthbound14]

All I gotta say is wow! I thought things were getting a little silly, but I had no idea they had become the worst savers in the world.

Koreans never do anything small...except recreation. One thing I don't get about Koreans, they seems to do nothing but work, spend money, drink, spend more money, then study, then sleep as much as humanly possible, watch TV 24/7 while doing all of the above and surf the internet in every second in between...

Interesting changes in the land of the Han. Not all good, but it is still interesting watching this society change at mach 10. One of the most curious little places I've ever been.

[cdninkorea]

A Korean sociologist, whose name escapes me, said that "Korea is the land of extremes." I have to agree, and this article is more evidence in an ever-growing pile of it.

[SeoulMan6]

[redaxe]

How are they ever gonna afford their 전세 and move out of their parents' houses now??

[kinerry]

Thanks Koreans!
Your time spent in the rat race got me free housing, a sweet job, time spent traveling, and half of my student debt paid down!

[coralreefer_1]

While I agree that the statistics cited in the article are valid points, I personally do not find the info as worrying as some of my fellow economists (I have an MA in Economics)

The article mentions that the driving force behind the low savings rate is income spent on education! This is very much different than money spent on Chanel or Columbia hiking gear, as the education is more on an investment rather than wasteful spending. Now the debate about whether or not these tired kids sitting through classes dazed and confused from lack of sleep and information overload is a waste is a debate for another thread.

It is true the Korea is a very competitive society in terms of lifestyle and success. I would suggest (whatever it's worth) that this kind of domestic competition among the population is a great thing to spur the advancement of the people as a nation. Michael Porter of Harvard university is quite well known for putting forth the now standard idea that domestic firms that face stiff competition in their domestic markets will be far more successful in overseas markets than firms from countries that do not face the same kind of competitive market at home. Competition is a driving force the compels firms (and in this case, people) to do more, learn more, and study more and to excel. Now the reason for it (vanity, pride, greed) are not glorious to consider, but the end game is that whatever their reasons for doing it, the end result will likely be more positive than otherwise.

If a guy spends a year working hard in the gym only because he wants to be able to go to the beach next summer with a nice body, his reason for doing it may not be savory, but in the end, that reason gave him motivation to do the exercise, which makes him better off (healthier body, though perhaps not a sexy body) than if he had no motivation at all and went to the beach as is. Same with two families who live across the hall from each other, spending millions of won every year for various education for their children, competing with each other to have the smartest child. In the end, both children are better off as they are far more likely to be smarter, more intelligent children than they would if they did not feel some type of competitive motivation.

As a nation, Korea has enjoyed what we would call an affluent lifestyle for only a very short period of time. I think it would be natural (as the economists point out) that the nation would have an adjustment phase where the newly-acquired success of the nation and its people would lead to a period of extravagance. When I got my first real job at 22, managing the service department for a local irrigation company back home, and my income tripled, I also went through a period of adjustment where I bought a new car, new wardrobe, began drinking more expensive beer..etc. This was not due to vanity as much as it was due to the fact that I had more income and I wanted to enjoy some of the finer things in life that had been unavailable to me before. I think that is a very natural response to changing conditions.

While the writing is on the wall concerning the data and it cannot be argued, consumer spending drives the economy. While on a personal level we would all agree that we should save more money, on a national level, more people saving money under their mattress or in their banks does not do much to help the Korean economy(or any economy) come out of the global recession, or to grow outside of a recession. If the situation were reversed (more people saving and not spending) economists would be compiling data to show how the low rate of consumer spending is worrisome. With economists, we are never satisfied and can and will ALWAYS find some aspect of the economy to point to and say this is an issue to devote attention to.

[kinerry]

[skeeterses]

On the education bit, I second the idea of diminishing returns. Its good that Koreans want to better themselves through education. But you only have to look at America to see the limits of education. People can spend thousands upon thousands of dollars getting their kids through education but at the end of the day, there's simply not enough jobs requiring college degrees.

Same thing with this hagwon system. If Koreans want to learn English, that's great. But when the kids all grow up, somebody among them has to cook at the restaurants, drive taxi cabs, teach math to younger kids, work on the construction crews, and perform a great deal of other jobs that require very little English. Again, people should be free to learn English if they want. But they shouldn't go bankrupt in the process because there's no guarantee of a return on investment.

[taobenli]

I keep wondering WHERE they got the statistic that Korea's suicide rate is the highest. Everywhere I look I find that Japan's is still higher, as well as a few other countries. Has anyone seen reliable OECD statistics on this?

[pkang0202]

[coralreefer_1]

Diminishing returns is a valid point, but one that goes beyond the scope of the article.

Even with diminishing returns, would you rather spend 1 thousand bucks on a surround sound theater system for your home, or spend that money of education for your children? Even a low-level education has more value into the future than a theater system that loses 90% of its value the moment you purchase it and take it out of the store.

The article deals with the lack of savings and discretionary spending, not on the value or lack thereof concerning the education that a large portion of said income is spent on. People could debate for years and years about the value of education , lack of jobs for highly educated people, but that is not the issue at hand.(I mentioned this disclaimer in the first paragraph of my post) There is more to education in Korea than ENGLISH education, though it is quite understandable than on an ESL forum, this industry gets the focus.

There may be a good portion of English teachers out there who do a crappy job, and therefore diminishing returns comes into play, but I don't believe all English teachers fall into that category, and for that matter, all of the math, science, Korean language, or all of the other forms of "education" parents are spending their money on. You will be hard pressed to convince anyone that money spent on education (regardless of how you or I value that education) is money wasted in comparison to money spent on buying a nicer car, bigger home, or expensive cosmetics.

[Cheonmunka]

My children (3rd grade/1st grade) cost me just a little with JEI math and reading and piano. They get fully subsidized for their swimming in the new pool at school - even in poor neighborhoods as the one I live in facilities can be good. My wife doesn't go crazy like other parents (mostly people in Kangnam spend crazily.) Just good old family at the dinner table kids studying four hours a night on it. My son got 100 percent for Korean when the average was 87. All subjects above average.
I think parents just throw good money down the drain and are lazy not to homeschool and are not in their right minds in general about purchases.
Other drivers steer away from me on the roads as they know the owner of a Ddong Cha car like mine doesn't have insurance or money to cover their mistake.

BTW: Wife didn't pay money to the teacher whereas the one in public school in MokDong had her friggin hand out and got a decent wad of cash from mothers.
My wife got a Prada lookalike bag for 40 000 won discounted from 80 000. People ask her how much she spent as it looks so like the original.

People are damned stupid to be spending from, and all of the equity built up in their apartments. Ten years ago an apartment in NoWon Gu was 130k. If you borrow 550-600k for it now then you are f &^%ing stupid.
I heard of one guy on a 30k salary 'bought' a 900 million won apartment in NoWon. Well, when the economy goes down and you're left with interest payments of 50k per year and no one is chonseiing and you've only got 30, wtf are yah gonna do? Well, your parents are going to sell all they have to keep you solvent.
Anyway, if/when IMF happens again this time I'm ready to snap up a few real estate bargains. Going by the figures of IMF (when apartments lost half value all around Seoul) I can get a large seven flat villa around here for 200k and chonsei/wolsei it out.
I say, 'bring on the recession.' I want to retire.

[Juregen]