Growing pains need addressingBank of Korea Governor Kim Choong-soo has joined a chorus of forecasts anticipating slowed economic growth for the country due to its low birth rate and aging population. The International Monetary Fund predicted that Korea’s growth rate in the next five years will likely lag behind the average economic pace of 184 countries. Samsung Economic Research Institute, which downgraded this year’s growth estimate, said the economy is showing signs of entering a long-term slowdown. Korea is an exemplary case of how a poor and developing country can transform itself and join the ranks of the wealthy in just 50 years. Officials have become so familiar with high growth numbers that anything below 3 percent sets off alarm bells.
Slow growth is normal for any advanced economy, but it does not usually need to be feared. As population growth eases, the labor supply falls, and as the economy swells, the accumulation of wealth winds down. However, in Korea’s case, such a slowdown could take a bigger toll on society because of the changing demographic of its population.
Society must prepare itself for a future that may well involve fewer new jobs, declining levels of income and smaller tax revenues but rising welfare cost rises. Low growth would also lead to low interest rates. And if yields fall, pension funds will rake in less returns. A yield loss of 1 percentage point in the national pension fund theoretically means its reserves will be exhausted five years earlier. The country’s future, as well as people’s lives, will be affected depending on how well society as a whole and individuals prepare for this age of low growth. There is no panacea or quick fix. Stimuli measures and monetary easing could do more harm than good as they can fan inflationary pressure and increase household debt and fiscal deficits. Authorities should work on a long-term plan while keeping microeconomic and monetary policies neutral. The government should continue with policies to encourage more births and address the issue of Korea’s greying society. Human resources should be upgraded to raise productivity, while more investments in R&D will help future growth. Low growth may be unavoidable; measures are needed to lessen the shock.
In December, people will elect a new president and leadership for the next five years. But debates have revolved around social welfare when more attention should be paid to sustaining growth. The BOK’s lowered growth forecast for this year to 3.5 percent has not caused enough concern.