Chip Boom Raises Dutch Disease Risk for Korea's Economy

For South Korea, a country that has always been short on natural resources, Dutch disease has been someone else's problem. The term refers to what happened after the Netherlands discovered North Sea gas in the 1970s: a resource export boom drove up the currency and eroded the competitiveness of manufacturing industries outside the resource sector.

The reason to raise Dutch disease now is the artificial intelligence boom sweeping Asian economies. Semiconductors are now taking on the economic role that oil and other natural resources once played. On the strength of chip exports, Taiwan's economy is projected to grow 9% in 2025 and 11% in 2026. Singapore and Malaysia, which produce and export AI server components, are expected to post growth above the 5% to 6% range. South Korea's own growth rate is expected to exceed the mid-3% range this year, far above its potential growth rate of 2%.

There are, to be sure, no signs of Dutch disease in Asia yet. For the condition to appear, a currency would have to surge after a chip export boom, weakening the competitiveness of industries outside semiconductors. As recently as early June, the won and the Taiwan dollar were in fact weak, pressured by domestic investors' overseas holdings and manufacturing investment in the United States.

But conditions have changed. The won-dollar exchange rate, which stood at the 1,559 level on June 4, has fallen more than 175 won in a little over three months to the 1,370 to 1,380 range. The shift reflects the repatriation of proceeds from SK hynix's American depositary receipt issuance in July and the conversion of dollar export earnings into won ahead of interim corporate tax payments. The Bank of Korea has also raised interest rates twice in a row, citing growth and price pressures tied to the chip boom.

A stronger won and higher rates are important tools for allocating resources efficiently. But the won has jumped 11% to 12% in three months, and upward revisions to semiconductor operating profit have stalled. Shares of automakers, shipbuilders, home appliance makers and defense companies, all sensitive to the exchange rate, have struggled to recover after sharp declines.

Two or three months of movement is no reason to worry about Dutch disease. The government's plan to create a future response fund, using increased tax revenue for the future, recalls Norway, which avoided Dutch disease through a sovereign wealth fund.

The policy mix of raising rates while maintaining an expansionary fiscal stance, however, warrants some thought. Technology industries generate little employment. Increasing fiscal spending to address polarization while raising rates to contain prices is positive for the won, but over time it could weigh on the competitiveness of industries outside semiconductors.

Ultimately, what matters is how to turn this chip boom into competitiveness that belongs to the domestic economy. This is not yet a stage that can be called chip-driven Dutch disease. A recovery in industries outside semiconductors would be the true measure of the economy's strength.