Of all the economic dilemmas facing Asian governments few now seem as pressing as how to persuade reluctant consumers to open up their pocketbooks. While officials in the past tended to direct most of their energies toward cultivating new export markets, luring foreign investors to local bourses, or building up foreign exchange reserves, an increasing number are realizing just how significant a contribution domestic spending can make to overall expansion – a realization that, in some cases, may have come too late.

In no two countries is this lesson being more starkly illustrated than South Korea and Thailand – consumers in the former still struggling under a mountain of debt and consumers in the latter just beginning to tighten their purse strings after a borrowing and buying spree fueled by a few heady years of stellar growth. How these scenarios play out in both countries is likely to have just as much impact on their respective economies as external factors such as oil prices and the performance of major export markets such as China and the United States. A flurry of policy initiatives in both nations demonstrate the increasing emphasis their governments place on nurturing domestic spending, but questions remain as to whether the desired outcomes will be achieved.

In South Korea, the situation seems to be one of worrying imbalance. Perhaps weary of the austerity brought on by the 1997 Asian financial crisis and the International Monetary Fund bailout that followed, South Koreans responded to historically low interest rates and credit-card giveaways by racking up an record $13 billion in debt by the end of 2003. The same year, nearly 4 million of the country’s 48 million people were three or more months behind on debt payments. Credit card companies were soon forced to engage in massive write-offs of defaulted debt, leading, in the most highly publicized case, to the near collapse of LG Card Company, rescued only this January after its creditors agreed on a 5 trillion won ($4.2 billion) bailout package.

The results of the consumer credit bubble have been, at least in terms of domestic spending, extremely troublesome. According to the Bank of Korea, the economy grew by just over 3 percent last year, but exports were responsible for 98.2 percent of this growth and domestic consumption a mere 1.8 percent, compared to 42.7 percent and 57.3 percent, respectively, in 2002.

Startling figures, to be sure, but some point out there are indications that things are about to get better – healthy exports in the first quarter of this year pushed gross domestic product (GDP) growth up to 5.3 percent, which appears to have given lackluster consumer confidence figures a superficial boost. The National Statistics Office reported that consumer confidence rose to a 19-month high of 99.9 percent in April – anything below 100 indicating the pessimists outnumber the optimists.

Unfortunately, it appears that while they’re increasingly hopeful, Koreans aren’t ready for any buying binges just yet. Private consumption is still falling – by 0.3 percent in the first quarter. The Ministry of Commerce also noted this month that combined sales at retail department stores dropped by 1.7 percent in April, and are likely to plunge even further over the next month or two.

The government’s response to the situation has been concerted – interest rates have been kept at historic lows for nearly a year, taxes on high-end goods such as cars and golf clubs were cut in March, and in May a program was launched to help restore the bad credit of over 3 million individual loan defaulters.

Whether such moves will simply encourage Koreans to borrow more money and launch the credit-bubble cycle all over again is open for debate, but what does seem clear is that the initiatives will do little to shield consumers from shocks that are looking increasingly probable. As the world’s fourth-largest oil importer, oil price rises are particularly damaging for Korea, and a US interest rate hike, coupled with China’s efforts to put the brakes on its breakneck economic growth, would spell trouble for the Korean exporters that are apparently single-handedly propelling the country’s growth. A month or two of lackluster figures would wipe out much of the hesitant optimism that just now appears to be taking root among Korean consumers. Therefore, over the short-term, the Korean economy appears to be standing on very shaky legs.

Thai officials, by all accounts well aware of Korea’s recent problems, at least have the benefit of a form of hindsight to work with. The economy, registering growth of over 6 percent, was one of the best performing in Asia last year, and the stock market doubled in value. This prosperity was no doubt based partially on a relatively weak baht, China’s appetite for Thai exports, and foreign investor interest, but was also thanks to a consumer base encouraged by low interest rates and government-initiated social spending programs.

The Bank of Thailand, however, is concerned that consumers have been encouraged a bit too much for its liking. Mortgage loans soared nearly 15 percent last year, and independent agencies like the Thailand Development Research Institute have estimated that average household debt has reached over 6 times monthly income, double what it was a decade ago. The response has been swifter and certainly harsher than that seen in Korea; in January the central bank released a master plan for the financial sector that will force many small-scale consumer credit firms to merge with larger – and more heavily supervised – banks or become extinct, and in March slapped new restrictions on credit card issuers, including rules on when and how they’re permitted to market their products to potential customers.

Such restrictions may not completely eliminate the risk of a Korea-style debt bubble, but they do demonstrate a willingness on the government’s part to take pre-emptive action – and a good thing, too, since last year, according to the University of the Thai Chamber of Commerce (UTCC), consumer spending accounted for nearly half of the country’s impressive GDP growth.

Thailand also faces many of Korea’s problems, of course – it too imports oil, and depends heavily on the US and Chinese markets – as well of a few of its own, like the unrest in the Muslim-dominated south. The stock market has taken a beating so far this year, and the UTCC’s most recent survey shows consumer confidence dropped in April to 101.6, a six-month low. But the same survey also shows consumer spending continues to rise.

This relatively positive picture may be in part to the government’s sunny rhetoric. Thai Prime Minister Thaksin Shinawatra has been careful to point out that the government will continue to subsidize oil prices and monitor the prices of basic commodities such as rice to ensure they don’t rise excessively, and continues to insist growth will this year reach 7 percent. For now, at least, the general public appears prepared to believe him.

Whether they address it with policies or pronouncements, the cases of Thailand and Korea indicate governments across Asia would do best adopt a two-track approach towards economic growth, monitoring domestic spending and consumer confidence with the same diligence they’ve applied to foreign exchange and encouraging exports, particularly given the affluence of the region’s swelling middle class. External crises can arise and pass with astonishing rapidity, but convincing consumers that it’s once again safe for them to part with their hard-earned – or borrowed – cash seems a longer, and infinitely more delicate, task.

© 2004 Jonathan Hopfner for KWR International, Inc.
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