On April 11th, the International Monetary Fund (IMF) slashed South Korea’s economic growth outlook to 1.7%, which decreased from its previous forecast last October. The decline resulted in a lower economic growth rate than what the government and the Organization for Economic Co-operation and Development (OECD) projected. While the world economy seems to recover after the coronavirus disease 2019 (COVID-19) curbs, the South Korean economy appears to be retreating. Therefore, the Sungkyun Times (SKT) would like to explore the reasons behind the negative outlook of the country’s economy.
South Korean Economy in Crisis
-An Outlook of the Korean Economy
Behind South Korea’s negative economic outlook stands the sinking of the long-term economic growth rate. Long-term economic growth is a figure constituting the strength of a country’s economy, evaluated by labor force and productivity. The labor force refers to individuals that seek job opportunities, while productivity refers to the ratio of output per input production factor. With loosened COVID-19 measures, the IMF projected the world economic growth as 2.9%, which is a 0.2%p increase compared to last year. The incline is considered a result of China resuming its economic activity after the pandemic. Amidst such movements, South Korea’s economy seems to be in crisis. Experts are also taking a pessimistic view of South Korea’s economic outlook, mainly due to a decrease in the labor force and productivity. The United States (U.S.) investment bank, Goldman Sachs, estimated that the size of South Korea’s economy would fall behind Indonesia in 30 years and drop out of the world’s top 15 economies.
-The Future of Our Economy
Accompanying the decline in growth, experts share a pessimistic view of South Korea’s economy itself. The Korea Development Institute (KDI) suggested three different scenarios for Korea’s economy in 2050: optimistic, centrist, and pessimistic viewpoints. The optimistic view proposes that South Korea will achieve 1.3% growth, the same rate as the top 25% of OECD countries. Meanwhile, the centrist view predicts a 1% growth rate, which is the average number for OECD countries. Lastly, the pessimistic scenario projects the number to be 0.7%, similar to South Korea’s poor growth rate in the 2010s. All three scenarios are ultimately anticipating a shrinking economy after a series of decreases in growth rates. The problem of a shrinking economy is that it can widen the gap between the rich and poor as income reacts more sensitively than other assets during economic contraction. Another issue is the increase in unemployment rates. In such a situation of downfall, it is vital to evaluate the current situation and come up with realistic solutions.
Issues with the South Korean Economy
-Growing Strain: A Sharp Decline in Labor Force
The labor force is a dominant factor in determining long-term economic growth, so its decline has been considered seriously for a long time. The cause of the decrease in the labor force lies in the devaluation of the working population due to a low fertility rate and an aging society. The term working population here refers to those between the age of 15 to 64, which has been diminishing since 2019 and has directly impacted the economy ever since. According to a report from Statistics Korea last April, the working population was around 35 million in 2020, but a sharp downfall to 26 million is predicted by 2040. Low fertility rates are the main cause of such a decrease in the labor force, contributing to economic and emotional burdens and even gender inequality. As a result, the South Korean fertility rate of 2023 has scored the lowest in world history, with 0.73 births per woman. Even Japan, a country well known as an aging society, has a fertility rate of 1.37 births per woman. In response, the government established the Basic Plan for Low Fertility and Ageing Society in 2006. It has been updating for every five years, but the results are so far still insufficient. Moreover, along with the shrinkage in fertility, the dependent population is growing. In other words, the working population will be under a notable caregiving burden in the future. Considering the current population projection, it is expected that 100 working people will support 60 older people by 2040, and the ratio will increase to a 1:1 ratio by 2065. Such caregiving burdens can result in a financial crisis due to increasing welfare expenditures and the decreasing labor force.
-The Least Productive Society
Productivity can be classified into capital, labor, and total factor productivity. In the case of South Korea, its pessimistic economic outlook is also mainly due to low labor productivity. Productivity increases when capital, technology, and other production factors are proficiently used. South Korea’s massive economic growth in the past was made by a combination of a sufficient labor force, as well as capital resources. However, its sufficiency was a product of individuals that spent a significant amount of time on labor. It was only possible in the past when industrial growth was considered much more important than an individual’s right and quality of life. Another factor that boosted economic growth was the imitation of advanced technology, which is unavailable today as South Korea has already made significant technological advancements. Today, according to the OECD reports, South Korea ranked 5th for the number of working hours among major countries. However, it ranked very low in terms of productivity, scoring 27th among 38 countries.
To Save the South Korean Economy
-Welcoming the New Labor Force
A working population must be acquired to solve the labor shortage issue; however, population problems cannot be solved in the short term. Thus, a more innovative and efficient policy is needed. One way to increase the employment rate is to encourage women and the elderly to engage in economic activities. Although women take a substantial part of the working population and own a high level of education, unfortunately, their curative participation rate is low. It is mainly due to difficulties in continuing their careers after childbirth. Therefore, guaranteeing women’s social status and offering birth-related welfare to ensure they continue their economic activities is vital. Korea is often criticized for focusing on simple monetary aid and lacking actual support for child welfare systems. It is also advisable to refer to foreign examples such as Sweden, which scored a high fertility rate of 1.84 and ranked 2nd in women’s labor participation among OECD countries. Sweden has solved its low fertility issue and women’s low economic engagement through monetary aid, gender equality policies, and changes in the overall social security system. In the case of problems surrounding the elderly population, extending the retirement age is considered a solution due to longer life expectancy. However, it is important to maintain and coexist with youth employment even if the extension of the retirement age is debated. Another solution to secure a higher rate of employment is actively using foreign labor pools as well as domestic ones. For instance, Japan is supporting foreign students’ employment domestically to solve its lack of workforce.
-Towards a More Productive Society
Productivity mainly lies in how efficiently given resources are operated. Hence, appropriate management techniques are needed. To increase labor efficiency, two solutions can be suggested: expansion of compensation and structural reform. Providing incentives and improving working conditions to increase work motivation can be part of the compensation. Structural reform suggests making the labor market flexible and restructuring companies. Currently, in Korea, there is a tendency for temporary workers to reduce labor costs, but this reduces labor efficiency due to their low labor skills. Another solution is to shorten working hours or introduce a flexible working system. It might reduce the level of output in the short term but increase productivity in the long run as idle time decreases. According to the survey conducted by HR Magazine, 74.3% of workers using flexible working time experienced increased productivity due to an improved balance of work and life. Kim Bae-geun, a Professor of Economics at Chung-Ang University, said to the SKT, “South Korea still relies on long working hours and low cost, which decreases labor productivity,” emphasizing that “It is vital to legitimately compensate the workers to increase the value of labor.”
Kingos will soon experience the shadow of Korea’s steep population cliff. As population problems cannot be solved in the short term, it is important to prepare for the new paradigm of the shrinking economy. Therefore, discussions of how we must cope with changes over the whole society seem more urgent now than ever.