Despite flattening the curve, South Korea faces economic challenges from COVID-19 as does the United States
At a time when a lack of test kits stalls the battle against COVID-19, Governor Larry Hogan of the state of Maryland made news in late April by receiving 500,000 test kits from South Korea. For his troubles, Hogan was criticized by President Donald Trump for not waiting until kits are available in the United States. The episode revealed one thing: South Korea has been far ahead of other countries in making test kits and other needed medical gear available to avert the worst of the plague.
In fact, Maryland is not the only entity that has turned to South Korea. South Korean exports of test kits grew by 120 percent in March as a number of countries have also reached out. Meanwhile, the number of daily new confirmed cases has fallen below 50 from what was once over 900 in South Korea.
Despite its success in flattening the curve, South Korea’s economy has suffered considerable damage, particularly in the service sector. The economy shrank by 1.4 percent in the first quarter of 2020, compared with the fourth quarter of 2019. The economy still grew by 1.3 percent from a year earlier. But both rates are the worst since 2008–09.
South Korea was better prepared than other countries
The country gained experience during the spread of the Middle East Respiratory Syndrome in 2015. For example, in responding to COVID-19, South Korea moved quickly to temporarily allow pharmaceutical firms and manufacturers to produce or import unapproved diagnostic products and eased the regulatory process so that private and public medical institutions could use them. The number of new tests started to mount in mid-February. During its peak, about 12,000 to 18,000 tests were conducted every day in South Korea. In the United States, where the first confirmed case was found on January 22, two days after South Korea, the number of new tests began to grow only in mid-March and now stands around 190,000 with variations across states. Also, South Korea quickly set up COVID-19 screening facilities nationwide.
Massive testing helped South Korea avoid a full lockdown situation. Instead, the government strongly recommended both strict self-quarantine for travelers and social distancing as containment measures. The “enhanced” social distancing campaign to stay home and work from home was in place until April 19. Both essential and nonessential businesses remained open while religious, sports, entertainment, and leisure facilities were closed.
In early April, the number of new daily cases in South Korea fell below 50 and continues to be steady even after the general election on April 15, in contrast to the postponed presidential primary elections in the United States. Starting on April 20, as the social distancing campaign was dialed down, religious/sports/entertainment/leisure facilities have gone back to business and must strictly conform to preventative and disinfection measures. Professional baseball games can resume without spectators in stadiums. Meanwhile, South Koreans voluntarily continue wearing masks in public.
But challenges remain much like in the United States
In spite of the COVID-19 curve leveling off, the South Korean economy has not escaped the ravages of the disease. The economic outcomes in South Korea, where no lockdown was implemented, can be compared with those in the United States, where more drastic measures were introduced.
During the pandemic, sectors were unevenly affected in South Korea. Production dropped by 3.5 percent economywide in February compared with January and by 0.3 percent in March. The service sector was hurt severely both in February and March, particularly the food/hospitality service sectors. The automobile industry, which was one of the hardest hit sectors in February, picked up its production in March after the resolution of the supply chain issue. In contrast, industrial production in all industry groups fell in the United States in March. Restaurants and bars experienced a sharp decline in their sales in the United States as well. South Korean capacity utilization in manufacturing dropped by 4.9 percentage points in February compared with January, a similar drop as in the United States in March. However, it bounced back in March by 3.4 percentage points in South Korea.
With a public inclination to reduce human contact and travel in South Korea, retail sales dropped by 2.3 percent in February. Brick and mortar sales dropped by 7.5 percent, while online sales jumped by 34.3 percent. Among offline sellers, sales increased for convenience stores and “super supermarkets” that people don’t have to travel far to get to. Sales of food products almost doubled online but dropped in department stores and supermarkets. In the United States, retail and food services also experienced a fall in sales in March. Department stores experienced a similar decline in sales as in South Korea. In contrast, sales of grocery and liquor stores soared, and nonstore retailers saw a 12 percent increase in sales, a modest growth compared with South Korea.
The South Korean labor market conditions deteriorated in March as the number of newly confirmed COVID-19 cases started to accelerate in late February. The unemployment rate climbed by 0.5 percentage point to 3.5 percent. The number of employed dropped by 2.5 percent, and the number of unemployed increased by 14 percent. The number of furloughs increased by 1.26 million in March (year over year). Hospitality and food services, healthcare, and social services were hit the hardest with the highest drop in the number of employed. The manufacturing industry experienced a milder shock by –0.7 percent. The number of initial applications for unemployment benefits in March jumped by 24.8 percent year-over-year and 46 percent compared with February. While the rate of decline in employment was similar, the rise in unemployment was more severe in the United States. Similarly, the leisure and hospitality sector was the most affected, while manufacturing sector was not hit severely. However, the US economy is likely to have suffered more damage, as the US official data for March do not capture the second half of the month.
South Korea was able to maintain its merchandise exports in March at its 2019 level. That month its exports increased to the United States and the European Union, where confirmed COVID-19 cases had started increasing. However, prospects for South Korea’s merchandise exports are no longer as bright. The World Trade Organization has projected that global merchandise trade will severely drop in 2020. Already in the first 20 days of April, South Korean exports have dropped significantly by 27 percent from the same time in 2019. Collapse in global demand could aggravate the indirect impact of COVID-19 on the South Korean labor market, especially its manufacturing sector.
Despite rapid public health responses and no lockdowns in South Korea, its labor market, especially the service sector, has hardly been spared from the wreckage of COVID-19. The main challenge for the South Korean economy in the coming months will be to sustain small and medium enterprises and service sectors and protect against external shocks. Equally important, as people return to normalcy, South Korea needs to remain alert to prevent a second wave of COVID-19.
1. To note, the total number of known confirmed cases reached 100 in mid-February in South Korea and in early March in the United States.
2. Percentage growth discussed in this paragraph is the year-over-year growth rate.
3. Based on a survey of 16 distribution companies conducted by South Korea’s Ministry of Trade, Industry and Energy. Half of the distribution firms are offline, and the other half operates online. Offline distribution firms are department stores, supermarkets, convenience stores, and “super supermarkets.”
4. Data are from Statistics Korea, Economically Active Population Survey. Numbers are seasonally adjusted. Growth rates discussed in this paragraph are over the month unless specified otherwise.