Wednesday, 20/9/2017 | 5:34 UTC+8

South Korea: A Rich Country With Poor-Country Virtues

South Korea

South Korea

South Korea is quite rich—it has GDP per capita of $35,277 about 65% of that of the United States, purchasing-power wise. Yet it runs a budget surplus, has positive real interest rates, and has avoided most of the policy errors of the rich world.

It also has projected 2015 and 2016 growth rates of 3.3% and 3.5%, according to the International Monetary Fund—not stellar, but better than all of its rich-world compatriots, including Singapore. South Korea’s stock market is not overvalued; indeed the KOSPI index is on a P/E ratio of only 10 so it’s not surprising Pacific Wealth has three Korean holdings, two conservative and one aggressive.

Amidst a shaky Europe, a sketchy Chinese stock market and rampant deficit spending that is the rule and not the exception among developed countries, let’s celebrate a wealthy country that stays that way through poor-country virtues.

Oh, and its government is stable, too. There is not much economic difference between the two major Korean political parties, so a legislative election in April 2016 and a presidential election in 2017 won’t change economic policies much. Both political parties favor infrastructure spending, while keeping budgets balanced and public spending manageable. That spending is currently 24% of GDP (about 30% including local government), making it among the lowest of rich developed countries (OECD countries).

President Park Gyun-hee of the center-right Saenuri party recently announced a public spending stimulus of $13.5 billion, but the 2015 fiscal balance is still expected to be a small surplus.

Although Korean governments are relatively frugal, the society takes education very seriously indeed, spending 7.6% of GDP on it, well ahead of the OECD average of 6.3%. South Korean students rank near the top in international tests of mathematics, science and reading, and the country’s research universities are world class. Thus, the economy’s tech sector, in particular, is competitive internationally.

Korea grew to wealth through the operations of the “chaebol”—conglomerates that received special favors and contracts from the state while spearheading the country’s export drive. These days, the Korean public’s attitudes towards the chaebol are decidedly ambiguous, with two chaebol CEOs currently in jail.

Nevertheless, the chaebol are still central to Korea’s growth, with Samsung in particular one of the world’s tech leaders.

South Korean growth slowed recently from an outbreak of MERS (Middle East respiratory syndrome), but the country’s medical and other systems coped well with the problem. After declaring an end to the outbreak recently, South Korea can expect an uptick in economic activity as international commerce returns to normal.

The Korean market peaked in 2011 and is still slightly below that level. Because earnings have continued to increase, valuations have become reasonable indeed, and the market now trades on a P/E of 10 times. For a country with irreplaceable educational and technical advantages, and a growth rate higher than the rest of the wealthy world, that is cheap.




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