"More Severe Than the IMF and Financial Crises"... Structural Reforms Needed for Growth Recovery [Construction Crisis Report]

PF Insolvency and Shrinking Demand: A Compound Crisis
When Construction Stops, Livelihoods Are Immediately at Risk
Jobs Dwindle as Wage Arrears Grow

An unprecedented crisis has struck the construction industry. Across various regions, there are reports that three to four well-known construction companies are "on the brink of bankruptcy." Already, in the first half of this year alone, four construction firms ranked within the top 100 in construction capability evaluations, including Shindongah Construction, have applied for court receivership. The number of general construction companies that filed for closure in the first half of this year alone reached 326. This is the highest figure in 20 years since related statistics began to be compiled in 2005.

This crisis is even more severe than the International Monetary Fund (IMF) foreign exchange crisis or the global financial crisis of the past. The foreign exchange crisis was caused by internal corporate insolvency, and the financial crisis stemmed from external shocks originating in the United States. This time, the crisis is being driven by a complex mix of factors: external factors such as high interest rates, soaring material costs, and weakened demand, as well as internal issues like project financing (PF) insolvency, oversupply, the transfer of subcontracting risks, and the collapse of the workforce.

The decline of the construction industry directly impacts the national economy. In May, the Bank of Korea nearly halved its real gross domestic product (GDP) growth forecast from 1.5% to 0.8% within just three months, citing the prolonged slump in the construction sector as the main reason. Construction is a core industry that supports both employment and the overall economy. It accounts for 15% of GDP and creates 10.8 jobs per 1 billion won of production, giving it a greater employment multiplier effect than manufacturing, which creates 6.5 jobs per 1 billion won. In the past, public sector orders served as a buffer during construction industry crises. However, with the private sector now accounting for more than 70% of the market, it is difficult to expect the same effect.

Apartment construction site in Bukgu, Daegu, halted for 11 months due to workers' wage arrears. Photo by Kang Jinhyung

The economic impact always hits the most vulnerable first. Over the past year, the number of construction workers has decreased by 97,000, falling below 2 million for the first time in eight years. Most of these workers are day laborers who rely on daily wages. When construction stops, they are immediately pushed into a livelihood crisis. Construction payments are reduced or disappear altogether for workers as they pass through subcontracting and informal resubcontracting, each taking their margin. If a company that has been delaying wages goes bankrupt, there is no solution. Even if money comes into a bankrupt company, workers cannot receive their unpaid wages, as the funds go to higher-priority creditors.

The construction industry is the only sector in which the government establishes a five-year workforce improvement plan. There is even a special law related to employment. These legislative measures were enacted to address issues not covered by existing labor laws, such as the absence of severance pay and job instability. This shows how difficult it is for the construction industry to maintain a normal employment structure without institutional support.

The fact that more and more people are being forced onto the streets because there is nowhere to work raises questions about the very reason for the state's existence. It is the role of the state to ensure that workers are not driven to the edge. Revitalizing the market and boosting the construction economy is important. However, this alone cannot protect the lives of workers who are shaken by repeated crises. The government must undertake a structural overhaul of the entire construction industry. Asia Economy, through its 12-part special series "Construction Crisis Report," will examine the reality of the crisis and explore ways to ensure the industry's sustainability.

Order of Articles in the "Construction Crisis Report" Series

<1-1> Construction Sites at a Standstill, the Collapse of Day Laborers' Lives

<1-2> "Three to Four More Bankruptcies Expected"...Mid-Sized Builders on the Chopping Block

<2-1> Project Financing: From Lifeline to Trap

<2-2> Easing Multiple Homeowner Regulations: The Key to Reviving Regional Real Estate

<3-1> "Every Day Is Nerve-Racking": The Shaky Subcontracting and Downstream Industries

<3-2> Even Major Companies Unable to Avoid Wage Arrears

<3-3> Wage Arrears at LH and Local Governments

<3-4> Even the President Steps In...Urgent Need for Vertical Structure Reform

<3-5> The Company That Survived Without Illegal Resubcontracting
<3-6> Joining Hands Amid the Collapse

<4-1> Foreign Construction Workers Encroaching on Domestic Jobs

<4-2> From 'Regulating Foreigners' to 'Protecting Domestic Workers'

<4-3> The Fundamental Cause of Deteriorating Profitability: Frequent Rework