[VIEWPOINT] Buried by avalanche of debt

The new year has started. We have raised enough glasses in celebratory toasts by now, and it’s time to get back to serious business.

Hopes are high for the G-20 summit slated to be held in Seoul in the latter half of the year, but we have yet to find our role within the world’s largest economic framework.

We must bring to the table ingenuity over common sense to create a new post-crisis world order and work toward a greater nation that promotes and is in sync with the happiness and well-being of the public.

To plan for the unpredictable future at the start of a new decade, we must stop and look back at our path over the last 10 to 15 years.

We attained a gross domestic product per capita level of $10,000 way back in 1995, and last year’s income per head was nearly double that amount, coming in at about $20,000.

We suffered a financial crisis in 1997 and again in 2008. The ship called Korea weathered large storms twice and yet continued on course because it steered right into the waves, no matter how high and menacing they were, riding through on the back of labor - and more than a fair share of luck.

But no success comes without a price. Korea and its economic partners now stand on a mountain of debt as a result. Debt, though obscure and hidden to the naked eye, is like a malignant tumor that grows and becomes incurable when discovered too late.

Debt in the public, private and household sectors has ballooned with the doubling of per-capita GDP over the past four years. Fiscal debt soared from 61 trillion won ($53.8 billion) to an estimated 366 trillion won. Although excluded from the fiscal debt portfolio, the debt load at public institutions has surged 173 trillion since 2002. According to the public service information site Alio, public-sector debt jumped by 265 trillion won from 2004 to 2008. When government and public-sector debts are bundled together, they account for 87.3 percent of the country’s GDP. This is by no means a small matter.

Individual debt also inflated as per-capita wealth grew. The sum ballooned by 647 trillion won, up 32 percentage points against the GDP. Personal debt growth took up 99.3 percent of the GDP increase during the same period.

The corporate front is even more serious. Private corporate debt expanded 1,115 trillion won from 2002 to 2006, up 57 percentage points against the GDP. Debt is also a part of assets and is instrumental in driving the economy. Loans naturally increase when economic activity picks up. If debt-based investments can generate greater returns than interest rates on loans, debt can stimulate the economy and growth.

But investments by the government and public sector rarely promise yields greater than interest payments on borrowing. Loans related to real estate and running small businesses make up most of the growth in individual debts. Their contribution to the country’s overall economic growth in the longer run is small. The debt ratio at large companies has been decreasing, suggesting corporate debt growth is largely attributable to smaller businesses.

In reality, the Korean economic miracle over the last decade can be said to have been built on a foundation of debt. Growth on debt is more perilous and fragile than a sand castle. Our children will be obliged to pick up the tab for today’s public sector profligacy. Individual debt is vulnerable to external shock.

The omens are beginning to show themselves. The volatility in private consumption exceeds the economic growth rate, adding to economic instability. Companies existing merely in name are everywhere. The government, companies and individuals essentially are busy paying loan interest from whatever they earn, as their interest payments combined make up 20 percent of the GDP.

Over the last 10 years, Koreans have been spending more than they can afford and largely living on debt. We never considered the fallout. We must face the music on our debt as we start a new decade. If we endeavor little by little to shed debt, we will be able to sustain prosperity and leave wealth to the future generation.

*Translation by the JoongAng Daily staff.
*The writer is an economics professor at Sungshin Women’s University.

By Kang Suk-hoon