Weathering the dark clouds over the economy

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Weathering the dark clouds over the economy



Jeong Jae-hong

The author is an international, diplomatic, and security news editor of the JoongAng Ilbo.

The South Korean economy is in peril. It added a mere 0.3 percent growth in the first quarter from the previous three-month period. The meager on-quarter growth follows a contraction of 0.3 percent in the fourth quarter. The snail’s pace of the economy is thanks to sluggish exports — more specifically, due to a slump in mainstay chip shipments. Korea’s exports last month totaled $52.2 billion, down 15.2 percent year on year to extend a losing streak for the eighth consecutive month.

Unfortunately, things can get worse as competitiveness in key export items is weakening. According to a study by the Federation of Korean Industries (FKI), out of 10 major export items, seven — including chips and electronic equipment, machinery, automobile and ships — have lost competitiveness during the last decade.

The Korean economy can no longer enjoy the halo of the China boom. Korea has benefited from China’s staggering growth by supplying intermediary and other goods for the global manufacturing powerhouse. But after China gained confidence and competence in its own products, it needs less Korean supplies.

The foundation for growth is also shrinking fast. The total fertility rate in the first quarter hit a new historic low of 0.78. While the working population is thinning, the number of the elderly who fall under their social responsibility is rising fast.

In its latest sovereign credit rating report, Moody’s pointed out, “The long-term risk to South Korea’s economic growth is intensifying demographic pressure.” It projected Korea’s growth potential to fall to 2.0 percent from 2025. The Korea Development Institute (KDI) in its economic outlook report in the latter half of last year forecast that the demographic changes from the thinning population and fast aging will slow growth for the country to put its annual growth rate at 0.5 percent in 2050.

Demographic danger from low birth and rapid aging darkens the country’s future. According to a survey by KDI researcher Lee Young-wook, those who believed in the elevation of the social and economic status of their children fell to 30.3 percent in 2021 from 41.7 percent in 2011. Due to the country’s growth uncertainties, the older generation thinks their children will be worse off than them when they reach their age.

The income gap between the rich and poor is widening further. According to Statistics Korea’s household income survey for the first quarter, the real income of the highest quintile gained 1.2 percent from a year-ago period while that of those in the bottom quintile fell 1.5 percent.

Bolstering the growth foundation for the economy is imperative for the country to combat its challenges. The demographic risks must be addressed quickly. The childcare and education policy requires an immediate overhaul so that young people can feel secure enough to have and raise children. Parenting today demands too much financial and physical commitment. As the old adage says, “It takes a village to raise a child.”

Public education also must play its role so that parents need not rely too much on private education. It is abnormal for parents to have little left for themselves in old age because they spend their lifetime money in educating their kids. To uphold a sustainable aged society, pension reform, extension of the retirement age, and increased immigration are needed. All these issues will face strong resistance from stakeholders. But they are essential for future wellbeing.

To raise the country’s growth potential, talents in science and technology must be groomed. Competitiveness in the future growth engines of chips, batteries and artificial intelligence depends on brain power. But the smartest prefer medical schools over science and engineering departments as they persue higher education. The phenomenon bodes badly for the ecosystem for future industry. Authorities must come up with incentives for science, math, engineering and technology majors and expand the medical school enrollment quota to ease the scarcity of doctors, which helped inflate the value of medical career.

A policy to widen the middle class is needed too. The middle class is a nation’s pillar. If it collapses, society could be crippled as class conflict intensifies. Many Latin American countries have been ruined from populist policies aimed at buying votes amid a steep wealth gap. President Yoon Suk Yeol stressed that a widened middle class is the safety net for the country. He vowed to vitalize the market to generate quality jobs and broaden the middle class.

To ensure upward mobility, political and economic engagement must widen. Inclusive politics and inclusive economy are interrelated. South Korea is an exemplary case for expanding political and economic inclusiveness by achieving both economic progress and democracy. The election system must be overhauled to expand political inclusion. Economic inclusion also must be widened by narrowing the income gap between regular and irregular workers, between large and smaller companies, and male and female.
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