Korea is on target, but no magic bullet

South Korea may top the list of growing economies, with an economic growth rate as high as 10 percent being forecast by some soothsayers.

Ten percent seems high–too high–for any industrialized economy. I don’t buy into such rosy visions. But even five percent would be a fine showing. Five sounds realistic to me, or at least a more solid number on which to base plans.

What does this mean for the Commonwealth?

Tourists, of course, and we can expect to see a continued rebound in the Korean sector.

Which is fine and dandy, but there’s a pitfall lurking here, and the Commonwealth is pretty good at jumping into pitfalls. Beware, then, a smokescreen of self-congratulations over tourism, when, in fact, the CNMI’s main market–Japan–was essentially abandoned a couple of years ago when the going got tough.

Can Korea make up for losing out on Japan? No. Not in the next ten years, anyway. The two sectors are not interchangeable, because the economic situations of the consumers are different.

Tourism is a good that is highly sensitive to the income of consumers. In technical terms, tourists have a high income elasticity of demand, meaning that small changes in their income can induce large changes in their vacation spending. If you find it a hazy issue, don’t feel bad about it: Nobody here who is making policy understands it, either, which at least is good for a giggle for folks in Guam who are enjoying increased market share at the CNMI’s expense.

Ah, but back to income and demand. To cite a good that has low (as opposed to high) income elasticity of demand, consider rice. If your salary doubled next year, you probably wouldn’t consume twice as much rice as a result.

Anyone who wants to do anything intelligent in business must understand the income elasticity factor and how it relates to his target consumers. Some businessmen understand this intuitively. Some don’t. And to understand it in detail is to delve into the sticky mathematical field of price theory, where differential calculus is used to calculate the optimal levels of prices for a business to charge, which is a function of a number of factors.

Looking back at consumer’s income, the easiest way to get a feeling for comparative figures is to compare per-capita Gross Domestic Product, which is the amount of economic output per person per year. There is, actually, a difference between per-capita GDP and actual income, but to delve into that gets into “national income accounting” distinctions that take a bit of time to apply to different economies.

So, for a quick ‘n dirty look at things, it’s per-capita GDP. On this note, Japan weighs in at $33,800. Korea: $9,511. That’s a mighty big difference. (We can do some adjusting of these figures to account for different costs of living in the two countries, which is a subject to be tackled another time.)

Las Vegas springs to mind as a booming tourism locale that successfully attracts all players in the economic spectrum. Poor white trash rolls in on buses, middle America goes on three day polyester-clad trips, and high rollers scream into town in Learjets. The Commonwealth doesn’t have as broad of an appeal, but a little understanding of the economics behind such things would sure go a long way here. Wishful thinking and amateur planning aren’t going to cut it. Korea’s growth is a positive factor for the CNMI, but it’s not a magic bullet.