COVID-19 Has Crushed Everybody’s Economy—Except for South Korea’s
Seoul seems to have shown the way to mitigating both the health and the economic fallout of the coronavirus pandemic.
SEOUL—As the United States struggles with a stubbornly persistent pandemic and a stubbornly slow return to economic growth, South Korea seems to have found the recipe to succeed on both fronts—if it can survive a late-year uptick in new coronavirus cases.
In the latest economic projections by the OECD, South Korea is looking at a mere 1 percent GDP contraction for 2020, the second-best performer among major economies behind only China. In contrast, the euro area is expected to shrink by around 8 percent, and the United States could see full-year contraction on the order of almost 4 percent of GDP.
“The world is facing the most dramatic economic slowdown since the Second World War,” said Laurence Boone, the chief economist of the OECD, introducing the newest outlook.
The OECD presentation underscored that economic success went hand in hand with success in tamping down the pandemic. That’s part of the reason for South Korea escaping relatively unscathed economically—starting with its highly effective management of the pandemic in the first place.
The United States and South Korea both recorded their first case of the new coronavirus on the same day; since then, cases in South Korea peaked at 851 new daily cases in March, before flattening to the single digits. In the United States, the cases never really plateaued until mid-July, where the peak was at 74,818 confirmed infections in a single day. South Korea has recorded seven deaths per million people; the United States has seen nearly 600 deaths per million, according to the U.S. Centers for Disease Control and Prevention and Johns Hopkins University.
That efficacious handling of the outbreak made a strict national lockdown—of the sort that paralyzed entire European economies for months on end—largely unnecessary in South Korea, which in turn meant less economic dislocation from shuttered factories, closed restaurants, and the like.
“The main reason is that they’ve been able to contain the epidemic much better than others, so disruptions to activity have been more limited,” said Christophe André, the senior economist for South Korea at the OECD.
That can be seen in Google’s mobility data, which shows South Korea barely changed its normal routines after the outbreak in late February, and what little changed quickly recovered in April. The biggest factors for change were weather and public holidays, not the virus. In contrast, hard-hit Italy saw shop visits plummet.
Further, even though South Korea wasn’t hit as hard as most other countries, it quickly launched a fairly aggressive fiscal response, pouring around $12.2 billion, or about 0.7 percent of the country’s GDP, into the pockets of businesses and citizens in early spring.
That wasn’t as big as countries such as Germany, which is launching a stimulus package worth around 4 percent of GDP, but because Seoul provided support quickly, it helped keep consumption up. South Korea is also continuing to provide support in the form of loans and guarantees totaling about $230 billion.
More to the point, South Korea has kept the fiscal taps open: Last week, it announced its fourth round of stimulus adding an additional $6.5 billion, and South Korean policymakers say that expansionary approach will likely continue through next year to combat the lingering economic impacts of the pandemic.
That, too, stands in contrast to countries like the United States, which started the year with a fiscal and monetary bang but which has since slowed down efforts to throw cash at the continued economic weakness. Earlier this month, the U.S. Congress failed to agree on a fresh stimulus package, after Republican lawmakers sought to trim already paltry benefits, while Democrats sought more aid for the huge numbers of unemployed Americans.
The OECD’s André said that fiscal response was one key to getting domestic consumption back on track.
“So domestic demand has remained relatively solid; there was a fall in consumption in the first half of the year, but there was a rebound which was helped also by fiscal support,” he said.
And South Korea’s fiscal response carried more bang for the buck than in other places. First, more businesses were open to spend those cash payouts at, which translated to South Korean consumers spending more and saving less of their bailout checks. A significant portion of the money distributed in the first three tranches of stimulus was spent by South Korean consumers; in the United States, many households simply banked much of their famous $1,200 stimulus check.
“There was a big impact on consumption, consumption rebounded actually, end-of-June consumption was up year-on-year, which is quite spectacular. So, this stimulus was very important,” André said.
Second, some South Korean provinces also used creative solutions to ensure that government payouts would be recycled into the economy and help boost consumption.
Lee Jae-myung, the governor of Gyeonggi province, the country’s most populous region, decided to test out non-cash payments. Each resident received 100,000 won, about $85, which could be spent over a three-month period. But it came in the form of a local currency that could only be spent in shops inside the region, rather than as cash that could be hoarded.
“We used the [money] to eat out at local restaurants; we ate out more often than usual to use the emergency funds,” said Lee Jong-hyang, a mother in her 50s in Gyeonggi province.
She wasn’t alone. “After the disaster relief was distributed [local businesses’] monthly sales went up 18 percent, and for small business owners, 56 percent of them said their sales went up,” said Heo Yeung-gil, the leader of the Safety Planning Division in Gyeonggi province, which oversees the distribution of the disaster relief.
Heo said that despite a price tag for the region of about $850 million, he believes the program is sustainable.
“It was to boost consumption and to create a more virtuous cycle of spending for the economy. And in that sense, yes, it is worth it,” Heo said.
Despite its relative success so far, South Korea is far from done dealing with the virus or its fallout. The country has been hovering between 100 and 200 new daily cases for over two weeks, stoking fears of a new outbreak. Seoul has been forced to restrict business activity, such as only allowing restaurants to serve takeout after 9 p.m. and making cafes carryout only.
South Korean President Moon Jae-in said that the government is walking “a tightrope between virus control and the economy,” and after pressure from local businesses Seoul eased those restrictions again, two weeks after they went into effect.
South Korea may even be in for more economic pain that it expected. The country’s central bank last month downgraded its full-year outlook for the economy to a contraction of 1.3 percent, a big jump from its earlier rosier estimates. The second wave of virus in South Korea is also what has caused the OECD to adjust its initial assessment from negative 0.8 percent growth to negative 1 percent.
And, as in many countries, deficit hawks are worried about the sustainability of big fiscal stimulus packages that can ameliorate short-term pain but only at the cost of long-term debt accumulation.
“Basically, it’s a government subsidy to the Korean people, but the thing is, we cannot provide subsidies forever. Because of these subsidies, the Korean government budget balance is deteriorating,” said Lee Doowon, an economist at Yonsei University in Seoul.
For South Korea, an export-oriented economy, that’s a particularly acute risk as the pandemic continues to depress cross-border trade.
“Korea depends a lot on international trade. And because of this pandemic, global trade has shrunk and that has a negative impact on the Korean export industry. Unless we make a serious breakthrough in the near future, this situation will be even worse in the coming several months,” Lee said.
Boone from the OECD agrees. South Korea’s hopes for a rebound next year depend on the rest of the world climbing out of the COVID-19 hole—and that is outside Seoul’s control.
“Looking ahead, Korea is very much integrated in the global economy,” Boone said. “And for that reason, the extent of the rebound will be either limited or helped by the size and the magnitude of the rebound elsewhere.”