OECD recently projected that Korea's potential growth rate will fall below 1.5% next year. This is the first time the potential growth outlook has dropped under 1.5%. While strong semiconductor exports are lifting the economic growth rate now, it cannot be assumed this will continue.
There was a "semiconductor illusion" right before the IMF crisis. After peaking in 1995, the semiconductor cycle turned, and prices of memory semiconductor DRAM plunged 51% in 1996 and 65% in 1997, eventually leading to the currency crisis. In 1998, Kang Man-soo, then the second vice minister at the Ministry of Finance and Economy (later minister at the Ministry of Economy and Finance (MOEF) and chairman of the Korea Development Bank), reportedly said at an Emergency Economic Countermeasures Committee meeting after receiving IMF bailout funds, "The structural crisis in foreign exchange began in 1993 when there was a brief surplus in the balance of payments. It was only a temporary phenomenon driven by a semiconductor boom, but blinded by that mirage, we missed the structural problems."
Experts warned that if the semiconductor boom that began last year is not connected to broader investment expansion and productivity gains across the economy, Korea will squander its chance to rebound in its potential growth rate.
◇ First semiconductor boom in the 1990s... DRAM price plunge triggers currency crisis
Korea's economy experienced its first semiconductor boom from 1992 to 1995. As PCs spread worldwide, DRAM exports increased. In 1992, semiconductors became Korea's No. 1 export item for the first time. Thanks to this, the export growth rate posted double digits in 1994 and 1995. In 1995, exports topped $100 billion for the first time ever. Riding the semiconductor tailwind, the economic growth rate climbed from around 6% to 8.9%.
Korea's leading semiconductor corporations—Samsung Electronics, LG Semicon, and Hyundai Electronics—posted double-digit annual sales growth in the 1990s. In 1994, among global semiconductor companies, Samsung ranked seventh, while LG Semicon and Hyundai Electronics ranked 20th and 21st, respectively. Samsung Electronics hired thousands each year. Its share price rose from the 10,000 won range in 1992 to the 120,000 won range by Oct. 1995. The three semiconductor firms also undertook trillion-won scale facility investments.
But the semiconductor boom began to end in 1996. DRAM prices for memory semiconductors plunged 51% in 1996 and 65% in 1997. The stock index, which started 1996 at 888.85, tumbled 27% to 651.22 on the last trading day of that year. In Seoul's foreign exchange market, the won-dollar rate surged from the 700 won range at the end of 1995 to the 800 won range at the end of 1996.
Experts say this kind of semiconductor slump became one of several factors behind the 1997 currency crisis. The semiconductor industry is a cyclical sector in which booms and busts repeat depending on changes in demand and prices for key products, inventories, and facility investment. Hit by the currency crisis without having prepared for a downturn, Korea's economy suffered a crippling blow and endured long-lasting aftereffects.
This kind of "semiconductor illusion" did not happen just once. In 2002 to 2004 and 2016 to 2018, surging DRAM demand pushed Samsung Electronics' operating margin into double digits, driving exports and economic growth. But a few years later, DRAM demand plunged and the semiconductor cycle weakened. On top of that, the global financial crisis and COVID-19 hit, shaking stock and foreign exchange markets.
◇ Exports at an all-time high but 42% are semiconductors... "Concerns they could shrink starting next year"
Recently, Korea's economy has been enjoying an unprecedented semiconductor boom. First-quarter nominal gross domestic product (GDP) rose 10.5% from the previous quarter. That is the highest since the first quarter of 1976 (13.0%) during Korea's high-growth years. Year over year, it also surged 17.1%. As export prices jumped on an explosion in semiconductor demand, nominal GDP increased.
The tilt toward semiconductors has intensified. May exports reached $87.75 billion, the highest ever (up 53.2% from a year earlier). Of that, semiconductors accounted for 42.3%. Dependence has risen to several times the share during the 1990s boom (in the 10% range). Exports excluding semiconductors and computers had a growth rate of only 9.5%. The KOSPI slid from the 3,000 level in the second half of last year to 8,800 early this month. Samsung Electronics and SK hynix make up about half of total market capitalization.
Heo Jeong, an economics professor at Sogang University, said, "The problem with our economy now is that industries are concentrated in semiconductors and regions are concentrated in the capital area," adding, "Starting next year, there are signs DRAM supply will increase and demand could decline, and if that materializes, we could face a serious situation."
Heo added, "We must not use the expanded fiscal space from the current boom for welfare or issuing consumer coupons," and said, "To rebound in the potential growth rate, corporations must be able to invest on their own in capital, talent, and technology, and the government should support by easing import supply-chain bottlenecks."