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.

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