Opening Their Wallets, Emptying Their Savings

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.

Asian Nations Revisit Safety Net in Effort to Bolster Spending

By PATRICK BARTA

Bangkok

Asian countries are beginning to build extensive social-welfare programs like those that long have existed in the West, a move they hope will encourage their people to save less, spend more and help put the region -- and the world -- on a stronger economic footing in the years ahead.

But creating a reliable social safety net is hard work, and it may be a long time, perhaps decades, before Asia sees results.

Analysts have long worried that Asians lack sufficient health, unemployment and other benefits to tide them over when downturns or emergencies occur, or to prepare for old age. Only about 30% of Asia's elderly receive a pension, according to the United Nations. Just 20% of its unemployed have access to unemployment benefits or other work-related social programs.

Partly as a result, Asians tend to save more and spend less of their income than their counterparts in the West. That contributed to the global imbalances that are one cause of the current world recession: U.S. consumers went deep into debt to finance consumption while Asians socked away money and relied on exports to Western consumers.

Social-welfare programs are one way of addressing those imbalances. The idea is that if Asian consumers have more confidence in their governments to take care of them in times of trouble, they will be more willing to spend today, igniting new demand for consumer goods and leaving the world economy less dependent on Western shoppers.

China recently said it will invest $120 billion to improve health care by building clinics and extending basic medical coverage to 90% of its 1.3 billion people within three years. Vietnam is implementing a national unemployment-benefits system. India has unveiled a voluntary pension system for up to several hundred million people who work at small companies, and is developing a nationwide identification database to better provide health care and other benefits.

Those programs build on efforts undertaken in recent years. Thailand launched a national health-care program in 2001 that offers basic medical care for just 30 Thai baht, about $1, to most citizens. India's latest national budget expands a program begun in 2005 that guarantees 100 days of work per year for rural laborers.

Public health expenditure* as a percentage of GDP in 2006

India	0.9
Indonesia	1.3
Philippines	1.3
Cambodia	1.5
Malaysia	1.9
China	1.9
Vietnam	2.1
Thailand	2.3
Australia	5.9
Japan	6.6
United States	7.0
High-income OECD	7.0
New Zealand	7.2

*Includes recurrent and capital spending from government, borrowings, grants and social insurance funds

Source: World Bank

The expansion of Asia's safety net "is happening, and it will help" wean Asia from an over-reliance on exports, says Robert Subbaraman, chief Asia economist at Nomura International in Hong Kong.

But many governments, including India, suffer from large budget deficits or lax tax collection, and may find it hard to finance expanded welfare programs.

In addition, a stronger safety net is no guarantee Asians will consume more. Europeans enjoy one of the world's most robust safety nets, and they tend to save more than Americans.

And it can take years, maybe decades, before consumers build up enough trust in welfare programs to modify spending behavior. In many Asian countries, such as Indonesia, services provided by social programs are dismal, with many residents avoiding government medical clinics altogether.

"The credibility of the systems has to be tested, and people have to be comfortable" that they still will be around after changes in government or economic crises, says Joseph Zveglich, an Asian Development Bank economist. Although he supports efforts to expand social safety nets, he says, "it's going to take time for people's activities to change."

Agence France-Presse

Consumer spending has fueled growth in South Korea, which reported its best quarterly performance in more than five years.

Some analysts say a better way to wean Asia off exports and encourage domestic consumer spending would be to let Asian currencies appreciate. That would make Asian exports less attractive to foreign consumers, give local consumers more spending power to buy imported goods, and force Asian business to diversify beyond exports. But Asian authorities may be unlikely to risk putting exporters in jeopardy by allowing their currencies to rise.

Those countries that have expanded their safety nets over the past decade have seen mixed results. In Thailand, residents were quick to take advantage of the country's new national health-care program. More than 45 million people registered to participate by mid-2003. Consumer spending shot up soon after the program was introduced, but economists believe the surge was driven more by an expansion of consumer credit and a sharp uptick in growth that occurred as Thailand's economy rebounded from the 1997-98 Asian financial crisis.

Growth in consumer spending later slowed, and in recent years Thailand's savings rate has begun climbing again after several years of declines, according to the Asian Development Bank. Most other major Asian countries have likewise seen their savings rates increase or stay about the same since the late 1990s, including Vietnam, where savings climbed to about 32% of gross domestic product in recent years from roughly 18% in 1995. Those trends could intensify in the future as the region struggles to fully recover from the current recession.

"In this economy, I'm trying to save as much as I can," says Banyen Sriwongrak, a 43-year-old vendor in central Bangkok who makes about $12 a day selling jasmine garlands near a religious shrine. She says she used Thailand's 30-baht health-care program to have a lump removed two years ago in a surgery that normally would have cost 16,000 Thai baht, or about $475. Having that protection was helpful, she says, but it hasn't fundamentally changed her spending, which includes squirreling away two or more days' worth of income each month and sending an additional $60 or so to support her mother in rural Thailand. "We don't know what the future will bring," she says.

None of that means Asian governments should stop investing in welfare programs. Such programs can greatly improve residents' lives even if they don't ultimately affect spending patterns. And the benefits in terms of changed consumer behavior may show up later.

Upgrading safety nets "isn't something that's going to get us out of the [current financial] crisis," says Mr. Zveglich, the Asian Development Bank economist. But if investments in the social safety net are made now, it may help the next time.

Write to Patrick Barta at patrick.barta@wsj.com