Why the U.S. Can’t Replicate South Korea’s Impressive Economic Recovery
South Korea’s recession ended in the third quarter of the year with the economy growing 1.9% from the second quarter. The country’s commendable control of Covid-19 has helped—but like China, its pre-existing economic structure was also key.
The real secret sauce for coming back from Covid-19 has been a mix of the two: getting the virus under control early, and benefiting from an existing export-heavy economic model.
At 5.5 percentage points, exports made the largest contribution to Korea’s GDP growth since at least 1960. Without that export boom, a slump in capital investment would have left Korea in recession. Private expenditures dropped 0.1% quarter-on-quarter.
A lift in exports has an outsize effect on Korea because the economy is far more trade oriented than most. In 2019, exports ran to about 40% of the country’s GDP, compared with 18.4% in China and 11.7% in the U.S.
Breaking down the components of the surge offers the clearest indication of why most economies in North America and Western Europe would struggle to replicate Korea’s performance. In September, the country’s three largest export groups—covering items such as electrical machinery, machine tools and heating equipment, and vehicles and their parts—all grew by more than 10% year-over-year. That is actually markedly stronger than the growth rates for the same period a year earlier.
Germany, Europe’s export champion, hasn’t controlled the virus as successfully as Korea or China, but has done well by European standards. Its third-quarter GDP won’t be released until the end of the month, but the International Monetary Fund expects the economy to contract by 6% this year, somewhat less than the 9.8% contraction forecast for both France and the U.K., or the double-digit drops projected for Italy and Spain.
Simply put, Korea’s expansion is in part to do with manufacturing the things that have found continued demand in the face of a global economic freeze this year. Its goods exports are now just 0.6% shy of their level one year ago, while services exports are still down 23.4%. Even if they had exercised Seoul’s impressive control over the spread of the virus, services-focused exporters would struggle to mimic that outcome.
The Korean economy now needs to grow about 2.8% to return to its size at the beginning of 2020. That is roughly the pace of growth that the International Monetary Fund expects for 2021.
The story for the Chinese, Taiwanese and Vietnamese economies is similar. All are undoubtedly doing better than would otherwise be the case if they had large, ongoing Covid-19 outbreaks, but a very large proportion of their outperformance should also be attributed to their economic structure going into the pandemic.
For some countries to be major net exporters, others must be net importers. Not every economy can grow by leaning on demand from overseas. Though controlling the virus is a prerequisite for an economic recovery, structure matters just as much—if not more.