In less than twenty years, South Korea has gone from being a nation of savers to one of the most reckless borrowers in the world. On both government and household levels, South Korea is deep in debt and a crisis could be brewing in the world’s 13th largest economy.
The numbers don’t paint a pretty picture. According to a recent report by the LG Economic Research Institute, 28 percent of South Korean households are unable to make payments on their debts each month and can’t cover their monthly expenses with their current income.
South Korea has a household debt to income ratio of 155 percent, meaning the average South Korean household spends one and a half times what it brings in. As of the end of July, household debt totaled 647.2 trillion won (US$573.25 billion), according to the Bank of Korea.
And that debt is costly. According to a report by Statistics Korea, low-income households are paying more in interest than ever before, with the average interest monthly payment standing at 36,219 won (US$32), 13.6 higher than the year before.
The Lee’s government’s aggressive spending can be partially attributed to the pressures of the 2008 global economic crisis. In times of crisis, inaction by politicians is unacceptable to South Korea’s energetic citizenry and a stimulus package of 6.1 percent of GDP was passed, the largest among OECD countries.
In the past, South Koreans might have accepted lower incomes and made serious adjustments to their lifestyles, but not nowadays. Many point to the proliferation of easy credit as a turning point. “This is a new phenomenon driven by the access to credit. Credit cards companies issue cards to anyone,” said Richard Meaders, professor of international business at the Hankuk University of Foreign Studies.
But not just anyone can get a credit card or bank loan. On public message boards and light posts in the South Korean capital, in between advertisements for plastic surgery and English classes are notices for another profit-driven lending service whose patrons are hoping to get ahead in one of the world’s most competitive societies. By dialing the number at the bottom of the paper, anyone can borrow money, “no questions asked,” the notices promise.
These rings of uncertified moneylenders have become a cottage industry in recent years. They don’t follow the legal maximum interest rate of 39 percent and they’re lending to people with no option besides abandoning their dream of home ownership or prestigious education for their children. Preying on South Koreans’ ambitions of class mobility, they make loans to delinquent and unqualified borrowers at exorbitant interest rates and threaten violence if timely payments aren’t made.
The reckless accumulation of debt now taking place in South Korea is scarily reminiscent of what took place in the U.S. ahead of the crisis of 2008. While the economy here isn’t large enough to mean that a crash would have large global significance, there is an important story unfolding here about what happens when a country reaches middle power status and overextends itself, and income inequality creates unrealizable ambitions. Not everyone in South Korea can be rich, but that doesn’t stop everyone from trying.
“There’s a pattern of fear and consumption,” said Baek Sung-jin, head of the Finance Consumers Association, a civic group that provides counseling to people in financial crisis.
“People are told by big companies that if they don’t have the right things no one will want to date them or be friends with them.” ..read more