[Market Pulse] Export Booms Do Not Automatically Translate into Domestic Demand

A current account surplus is not an "overall economic report card"
Reform regulations that hinder the entry and growth of service businesses
Income boosted by the semiconductor boom
Must be channeled into household purchasing power and domestic i

Assessments of China’s economy have recently diverged between praise for the remarkable performance of its innovative industries and criticism of weak domestic demand and excess capacity. Those emphasizing the latter sometimes invoke Japan’s “Lost 30 Years,” pointing to shared challenges such as a property-market slump, debt burdens, weak consumption, and an aging population. Whether China will follow in Japan’s footsteps remains uncertain, but the two countries’ experiences show that manufacturing competitiveness in global markets and vitality in the domestic economy do not always improve together.

Containers stacked at Pyeongtaek Port in Gyeonggi Province. Yonhap News Agency

Japan’s prolonged economic stagnation began with the collapse of the asset-price bubble in the early 1990s. Asset values plunged, but debt remained, and companies focused on repaying loans while cutting back on new investment. As consumption and investment weakened, prices and wages stagnated. Expectations that demand would not grow then further discouraged investment.

Delays in resolving nonperforming loans and restructuring companies compounded the problem. Banks extended loans to troubled companies to avoid recognizing losses, tying up capital and workers in low-productivity businesses. Zombie companies also made it harder for healthy businesses to invest and for new firms to enter the market. Aging and slowing productivity added to the challenges.

From 2002 to 2008, exports and capital investment grew, ushering in a 73-month economic expansion, the longest in Japan’s postwar history at the time. But wages and consumption recovered slowly, leading some to describe it as a “recovery that people could not feel.” The period shows that an export-led expansion can coexist with weak domestic demand.

China responded differently to similar shocks. The property-market correction that gained momentum around 2021 weakened household asset values and consumer sentiment, while also putting pressure on local government finances. The Chinese government sought to fill the growth gap by accelerating investment in manufacturing and technological innovation, and these investments did contribute to stronger competitiveness in electric vehicles and batteries. But household purchasing power has been slow to recover, fueling criticism that China is shifting the burden of weak domestic demand abroad, as well as debate over excess capacity.

Producing more than a country consumes domestically does not, by itself, mean there is excess capacity. Specialization aimed at serving global markets is fundamental to trade. The core of the debate over China is whether subsidies, preferential financing, and overlapping investments by local governments are encouraging capacity expansion without sufficient regard for profitability and delaying the exit of loss-making companies. The benefits of technological innovation and the inefficient allocation of resources can coexist even within the same industry.

China’s goods trade surplus reached $1.189 trillion last year, exceeding $1 trillion for the first time, and stood at $938.1 billion through September this year. Exports absorbed some of the shock from the property slump but did not sufficiently revive weak domestic demand. Producer prices fell for 41 consecutive months before turning upward in March this year, largely due to rising energy and raw-material prices. In September, producer prices rose 5.0% from a year earlier, while consumer prices rose just 0.9%. The larger an economy like China’s is, the more resistance it faces from trading partners when it tries to make up for weak domestic demand with overseas demand.

What lessons do the experiences of these two countries offer South Korea? First, a current account surplus should not be read as an overall report card on the economy. The current account is not a country’s income statement. A surplus means that national saving exceeds domestic investment, with the difference leading to the accumulation of foreign assets. A surplus can grow because export competitiveness is strong, but it can also grow when households cut consumption and businesses hesitate to invest at home. In the second quarter of this year, South Korea’s gross saving rate was 45.6%, the highest since statistics began in 1970, while the gross domestic investment rate was 24.2%. Domestic consumption and investment grew more slowly than income.

According to the Korea Center for International Finance, eight foreign investment banks’ forecasts, compiled as of the end of September, put South Korea’s current account surplus this year at an average of 17.5% of gross domestic product (GDP). The previous record was 10.1% in 1998, the year after the Asian financial crisis, according to International Monetary Fund data. The surplus then resulted from the collapse in domestic demand, which caused imports to fall by more than a third. This year, by contrast, the main drivers are positive shocks: demand for artificial intelligence (AI) and rising semiconductor prices.

However, such positive shocks do not guarantee a virtuous cycle in domestic demand. In the second quarter of this year, real gross national income (GNI) rose 15.6% from a year earlier, but real household disposable income grew just 5.5% and private consumption 2.5%. Over the same period, total nominal operating surplus rose 48.2%, while employee compensation increased 8.1%. This means there is a lag, as well as constraints, between income growth driven by a boom and the resulting increase in consumption.

It takes time for corporate profits to reach households through performance bonuses, dividends, and tax revenue. In capital- and technology-intensive industries such as semiconductors, increased production also translates into a limited expansion in employment. When consumption is weak, domestic-demand-oriented companies put off investment; without more investment and hiring, household incomes also recover slowly. Even when incomes rise, households with heavy debt burdens must prioritize loan principal and interest payments, while those without homes prioritize saving to buy one. A sharp drop in property prices, as in Japan and China, is a problem, but high housing prices also suppress consumption. Policy should guard against sharp swings in home prices while focusing on stabilizing actual housing costs, including rent and loan repayments.

Second, industrial policy should support innovation and productivity growth while preventing resources from being tied up in troubled companies. According to the Bank of Korea, the share of marginal companies among businesses subject to external audits whose interest coverage ratio remained below 1 for three consecutive years rose from 17.1% at the end of 2024 to 19.1% at the end of last year. The Bank of Korea expects this share to decline this year, but says vulnerabilities could grow in industries facing weak business conditions. Restructuring support should focus not on keeping troubled companies afloat, but on helping workers who need to change jobs find new employment and protecting their incomes.

Third, channels must be expanded so that rising incomes are spent and invested domestically. Regulations that impede entry and growth in the services sector should be reformed, and the use of AI should boost productivity at domestic-demand-oriented companies and lead to the development of new services, beyond increasing semiconductor exports. Part of the additional tax revenue should also be used to expand the capacity to provide essential services such as care. Reducing the need for households to save excessively out of concern about future expenses is another way to strengthen the foundation of domestic demand.

The experiences of Japan and China show that the success of export industries does not automatically resolve problems related to debt, domestic demand, and resource allocation. South Korea’s economy can be considered truly transformed only if it channels the income generated by the semiconductor boom into household purchasing power and productive domestic investment.

Kwon Nam-hoon, President of the Korea Institute for Industrial Economics & Trade

This content was produced with the assistance of AI translation services.