Bank of Korea warns of 'Dutch disease' risk from semiconductor over-reliance

South Korea's economy faces the risk of developing a condition similar to 'Dutch disease' if it continues to concentrate excessively on the semiconductor industry, the Bank of Korea has warned. This over-reliance could stifle the growth of other industries and leave the nation's economy fragile during downturns.

The central bank's report, "Spillover Effects of Semiconductor Boom on the Real Economy," highlighted that while the semiconductor sector is experiencing a boom, the benefits may not spread evenly across the economy. The report noted that the combined operating profit of Samsung Electronics and SK Hynix is projected to surge sevenfold this year, significantly exceeding the profits of all other listed companies combined. This concentration of profit could potentially erode the growth foundation of other industries by absorbing talent and investment.

While the Netherlands experienced 'Dutch disease' from a natural gas discovery, South Korea's situation stems from a boom in a technology-intensive product. The report points out that the semiconductor industry relies heavily on imports for manufacturing equipment, with 60% of it sourced externally, compared to 35% for other industries. This limits the trickle-down effect of increased investment. The Bank of Korea recommends that the government manage its finances conservatively, even with anticipated increases in corporate and dividend taxes from the semiconductor sector, to prevent economic imbalances.

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We must be mindful of the possibility of 'Dutch disease' occurring, which absorbs personnel and investment from other sectors, thereby eroding the growth foundation.