Over the course of two decades, South Korea quickly morphed from a country of savers to a nation of spenders and borrowers. The country now hold the most credit cards per capita in the world, according to statistics from the Bank of Korea, with five times as many credit cards as people.
Young-Sik Jeong, a research fellow at the Samsung Economic Research Institute in Seoul, tracks household debt in South Korea. In 1990, he found, Koreans saved on average 22.2 percent of their net household incomes. By 2012, that figure had dropped to 3.4 percent. And the ratio of household debt to disposable income in 2012 was 160—higher than the U.S. in 2007 before the housing bubble burst.
While Seoul is the home of “Gangnam Style,” named for the upscale, status-obsessed district parodied in singer Psy’s hit song, and a mecca for plastic surgery in Asia, the rise of conspicuous consumerism doesn’t fully explain how Koreans’ financial habits changed so quickly.
Jeong estimates that mortgage loans account for roughly two-thirds of Korean household debt, and high housing costs mean loans run staggeringly large. Data collected by the McKinsey Global Institute show that the average home price in Korea is 7.7 times the average income; in the U.S., that ratio is 3.5. Meanwhile, borrowing for education-related expenses—such as elite after-school tutors and college tuition—also accounts for a significant portion of household debt. In other words, Koreans’ meritocratic aspirations help fuel heavy spending.
“It’s not just about keeping up with the Kims. It’s about not being left behind; that’s a real anxiety point in a fast-moving society,” says Tom Coyner of Soft Landing Consulting in Seoul, a business consulting firm. “The whole Korean economy works on the principle of being overleveraged. From the outside, it looks like [a] giant Ponzi scheme, but it’s manageable as long as the Korean economy keeps plugging forward. If you’re not overleveraged, there’s a massive fear that someone else will invest more and you’ll be left behind.”
The debt boom is possible because credit is now readily available. “It was very difficult for households to borrow money in the 1990s,” says Jeong. “Financial institutions preferred to lend money to corporate interests.” Now it’s much easier for families to get bank loans and multiple credit cards. “About a decade ago, when credit cards first became widely available, you had people literally on the sidewalk with folding tables and credit card application forms,” remembers Coyner. “And people started to use them as responsibly as college freshman.”
The slowing of the Korean economy over the past two decades has made it more difficult for middle-class families to save. In the mid 1990s, before the 1997 Asian financial crash, real income growth hovered around 6 percent or 7 percent. After a few rough years, income growth recovered to nearly the same level by the early 2000s. But for three of the past five years, real income growth has been negative. And unemployment has been creeping up. “The young generation has a lot of difficulty finding good jobs,” says Sarah Kim, a reporter for the JoongAng Daily in Seoul. “School and work are so competitive now because there’s less job security and not enough good slots for everyone.”
And the global implications of South Korea’s new debt culture? “It’s a concern, but not a major concern right now,” Coyner warns. “But it could prove to be a very weak corner of the country’s foundation in the event of another global financial trauma.”
Larson is a Bloomberg Businessweek contributor.
