Internal Imbalances Between Manufacturing And Service Industries

As noted in Section 2.3, the imbalance between the manufacturing and services sectors is reflected in the behavior of the goods and services accounts. The weakness in the services sector is also reflected in its labor productivity trends. Table 5 [ PDF 83.6KB | 1 page ] shows that the employment share of services has been increasing over time—from 34.3% in 1970 to 65.2% in 2005. However, services' share of value added has not been increasing at the same rate, rising from 44.29% to only 58.96% during the same period (Figure 20 [ PDF 83.6KB | 1 page ]).⁸ This means that the labor productivity of the services sector has been decreasing over time. An analysis by Lee (2005), has shown that while the manufacturing industry has enjoyed high productivity growth over the past few decades, Korean service industries including finance, insurance, real estate, construction, wholesale and retail trade, and restaurants and hotels sectors have had low productivity growth.⁹

5.1 Education and business services: shortage and poor quality of supply

In education and business services, which are directly reflected in current account balances, the problem lies in the shortage and poor quality of supply. Although the shares of education and business services in value added have been increasing in nominal terms, these shares have actually been declining in real terms (i.e., increases have been mainly due to rising prices). From 1995 to 2008, education's share in value added increased from 4.94% to 6.52% in current prices but decreased from 6.97% to 5.80% in constant prices. Business services give a similar picture: value added in current prices increased from 3.98% to 5.42%, but decreased from 4.97% to 4.87% in constant prices during the same period.

Korea's education problem is very complicated, and goes beyond the scope of this paper. However, the huge number of Koreans studying abroad suggests that Korea's education services cannot meet domestic demand. Korean students comprise the bulk of overseas students in the US (127,185 students in 2008, or 14.8% of the total), Canada (27,549 students in 2005, or 15.4% of the total), and PRC (80,000 students). The story is similar in Australia, Japan, New Zealand, and the United Kingdom. Given the size of Korea's population—about 50 million—these levels are rather surprising, and it is not difficult to guess how much money goes to these overseas students.

The supply of business services has likewise been insufficient. In terms of value added, business services comprised only 5.6% of GDP in 2005, compared to 11.5% in the US, and 7.7% in Japan. Employment in business services gives a similar picture: 6.8% of workers are in Korea's business services sector, compared to 11.7% in the US and 10.5% in Japan.

5.2 Traditional services: shortage of demand

While the supply of traditional services is more than sufficient, labor productivity is relatively low. The productivity of the wholesale and retail trade, restaurants and hotels sectors was only 22% of producer services in 2003. The productivity of social and personal services was also very low, amounting to only 43% of producer services. This is due to too much supply and too little demand.

The excess supply of traditional services arose from efforts to restructure the economy after the financial crisis. Most of the workers who were laid off shifted to the services industry, opening small restaurants and laundry shops, or becoming taxi drivers. For example, the employment share of restaurants and hotels sector increased from 9.46% in 1995 to 10.6% in 2008, while its share in value added (in current prices) decreased from 2.65% to 2.39%.

Meanwhile, the shortage of demand for traditional services has a lot to do with the declining income share of households. The share of households and private unincorporated enterprises in national income fell from 74.20% in 1996 to 64.09% in 2008 (Figure 21 [ PDF 16.7KB | 1 page ]). This drop of about 10 percentage points in household income has eroded the most important basis for domestic consumption.

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