South Korea's economy appears to be thriving, buoyed by a surge in artificial intelligence (AI) and record-breaking performances from leading semiconductor companies. However, beneath this prosperity lies a significant threat that could fundamentally weaken the economic structure.
The Bank of Korea recently issued a stark warning regarding 'Dutch disease' in its report on the 'Impact of Semiconductor Boom on the Real Economy.'
Dutch disease refers to the phenomenon experienced by the Netherlands after discovering a massive natural gas field in the North Sea in 1959, which led to a severe economic downturn following a resource boom.
When exports of a specific resource or industry surge, foreign currency floods in, causing the domestic currency to appreciate and triggering high inflation and wage increases. This diminishes the price competitiveness of other manufacturing sectors, ultimately damaging the domestic industrial ecosystem. As resources deplete and the industrial cycle enters a downturn, the entire economy can collapse. This scenario bears a striking resemblance to South Korea's current situation.
Samsung Electronics and SK Hynix are projected to report a combined operating profit of approximately 639 trillion won this year, more than double the total operating profit of all other listed companies in South Korea, which stands at around 308 trillion won. Essentially, these two companies are shouldering the national economy. In contrast, the performance of companies in the same semiconductor sector that supply materials, parts, and equipment is lackluster.
About 60% of South Korea's semiconductor industry relies on imports for materials, parts, and equipment. Even with substantial capital investments, most of the returns flow back overseas, resulting in a weak link to job creation and domestic demand.
Despite these concerns, some lawmakers are advocating for the redistribution of what they term 'excess profits' generated by companies during the semiconductor boom. This debate is ongoing within government circles. Minister of Trade, Industry and Energy Kim Jeong-kwan argues that companies should be encouraged to reinvest their excess profits into the industry, while Minister of Employment and Labor Kim Young-hoon expresses the need for social redistribution.
The root causes of Dutch disease and its Taiwanese counterpart are not simply due to high earnings. They arise from the short-term wealth generated by a boom being squandered on extravagant spending.
Thus, the proposal to artificially distribute excess profits is akin to a poison that exacerbates Dutch disease. Historically, every unprecedented boom has been followed by a harsh recession. The excess profits earned during prosperous times serve as a buffer to withstand downturns and as resources to secure leadership in next-generation technologies. The political push for redistribution appears to be a statistical illusion aimed at garnering immediate votes, resembling classic populism.
Investment priorities are clear: the materials, parts, and equipment industry. Investments from major semiconductor firms should lead to the growth of small and medium-sized enterprises in South Korea, maximizing the trickle-down effect. Creating a virtuous cycle where the prosperity of large companies translates into increased sales and job growth for domestic partners is the true essence of 'coexistence and distribution.'
Moreover, to prevent excessive capital and talent from concentrating solely in semiconductors, industries where South Korea has strengths, such as biotechnology, secondary batteries, and AI services, should be nurtured as next-generation strategic sectors. The profits earned by private companies should not be distributed by politicians as a form of charity; instead, a market-driven ecosystem for redistribution is the only path to sustainable prosperity.
* This article has been translated by AI.
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