My first experience with South Korea (or Korea) goes back to my university era when I, more by coincidence than anything else, ended up in a student exchange program there. It was during that time that I got my first insight into the country’s economic development, which could probably be best described with the phrase “from zero to hero”.
Today Korea is one of the most economically and technologically advanced nations on the planet, but it wasn’t always like that.
Merely fifty years ago it was one of the poorest places on Earth. The country was poorer in fact than most of Africa and South America, and, ironically, poorer than its neighbor North Korea.
With the help of a stronger industrial base established during the pre-war Japanese colonial era, and excessive aid from the other communist countries, particularly from the Soviet Union, North Korea managed to quickly get back on its feet after the end of the Korean War in 1953. South Korea, on the other side, was suffering from political instability and high inflation. Interestingly enough, South Korea surpassed the economy of its northern neighbor only during the 1970s.
Things in the South started to turn around in 1961, when military general Park Cheung-hee (father of the current Korean president Park Geun-hye) took power and began the industrialization of the country through five-year economic plans.
In the fifty years since, South Korea has turned from one of the most impoverished to one of the world’s richest nations per capita. This remarkable economic transformation, also dubbed as “the miracle on the Han River”, after the Han River that flows through the Korean capital Seoul, was led by the chaebol, Korea’s family-owned conglomerates.
Chaebol such as Samsung, LG, Kia or Hyundai are synonyms for electronic gadgets or cars for many outside of Korea. But as I learned when squeezing toothpaste out of a LG branded tub, there’s much more to chaebol than that. In Korea, many of these chaebol supply pretty much everything, from toilet paper to medical care.
A concept partially related to chaebol is something called jeonse. Wikipedia describes jeonse as:
“A real estate term unique to South Korea that refers to the way apartments are leased. Instead of paying monthly rent, a renter will make a lump-sum deposit on a rental space, at anywhere from 50% to 100% of the market value. At the end of the contract, usually two or three years, the landlord returns the amount in its entirety to the renter.”
To better understand the important role jeonse plays in the South Korean economy, let’s look at the Korean era of industrialization. Rapid economic transformation drew farmers from rural areas to seek higher paying jobs in the cities. With that the need for additional housing to be built occurred. However, local banks were mainly focused on financing chaebol and access to credit for smaller entrepreneurs was often limited.
Jeonse, a system with roots going back to the period of ancient Korea, turned to be a convenient solution to both problems. It is a hybrid of a rental system and informal lending scheme. Imagine pledging your empty apartment as collateral for an interest free loan to finance expansion of your business. On the other side, it induces people to pool savings, which would over time be used for purchasing their own home.
The system proved to be particularly resilient during the Asian financial crisis in 1997 when it offered an attractive alternative to fragile and heavily indebted banks. To reduce the hefty debt burden Koreans were queuing up to donate their gold to the state. Ultimately this campaign became so popular that the officials feared that this would drive down the global prices of gold. From what I’ve experienced so far this gesture paints a pretty accurate image of Korean patriotic spirit.
Jeonse, however, is not a bulletproof system. It only works well in the environment of high interest rates and rising real estate prices. In the wake of the Asian crisis, first cracks began to show in the system. Interest rates came down to historically low levels and landlords started to raise the deposits to match their return on investment.
After the collapse of Lehman Brothers, Korean property prices started to lose steam. Since then even more people have turned to renting instead of buying an apartment that is declining in value. This pushed jeonse prices even higher. As of last year a tenant would on average have to put down a $290,000 deposit to rent an apartment in Seoul.
High deposits and low return have incentivized many tenants and landlords, respectively, to start turning to a monthly rental system that is more familiar to the Western world and dubbed wolse in Korea.
Also akin to the Western world as well as Korea is the high level of debt. Korea today has one of the highest consumer debt levels in the world, largely accumulated in the last two decades. It is considered to be one of the biggest threats hanging over the Korean economy.
In the last few decades, Koreans have proved that they are capable of achieving a lot. They have a proven track record of economic successes, which I hope will not be broken when dealing with debt.
As I am sitting at the airport to leave the country, perhaps, 화이팅, a Korean word for encouragement is the best way to wrap it up.
“When I was growing up in South Korea in the ’70s and early ’80s, the country was too poor to buy original records. Everything was bootlegged.” – Ha-Joon Chang