Korea must tackle era of 1% growth with bold reform plans

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Korea must tackle era of 1% growth with bold reform plans

Published: 13 May. 2025, 00:00

Audio report: written by reporters, read by AI

U.S. Secretary of the Treasury Scott Bessent and U.S. Trade Representative Jamieson Greer attend a news conference after trade talks with China, in Geneva, Switzerland, May 12, 2025. [REUTERS/YONHAP]

The recent agreement between the United States and China to temporarily suspend some tariffs offers a rare moment of relief for Korea’s export-dependent economy. Under the deal, Washington will reduce additional tariffs on Chinese goods from 145 percent to 30 percent, while Beijing will cut its retaliatory tariffs on U.S. goods from 125 percent to 10 percent. Although the truce is limited to 90 days, it helps ease global market uncertainty and may provide positive momentum for Seoul’s own trade talks with Washington.

Yet the broader outlook for the Korean economy remains troubling. In its May report, the Korea Development Institute (KDI) warned that worsening external conditions are beginning to show up in key indicators, with declining domestic consumption and weakening exports. Korea’s shipments to the U.S. fell 6.8 percent last month and show no signs of rebounding this month. Concerns are mounting that the economy may post negative growth again in the second quarter, following a 0.2 percent contraction in the first. An annual growth rate in the zero percent range no longer seems out of the question.

Underlying these short-term risks is a more troubling long-term trend: the erosion of Korea’s fundamental growth potential. The OECD recently forecast Korea’s potential growth rate for 2025 at just 1.98 percent — a steep decline from 3 percent in 2017. The drop is sharper than in most other OECD countries. KDI and the National Assembly Budget Office already estimate the figure has dipped to around 1.8 to 1.9 percent. This represents the highest rate of growth the country can achieve without triggering inflation, using all available labor and capital — underscoring how far the economy has weakened.

Korea faces a complex web of structural challenges. A shrinking working-age population, caused by low birthrates and rapid aging, is reducing productivity. Investment in capital and technology has slowed, and regulations continue to constrain businesses that should be leading innovation. Externally, the rise of protectionism and accelerating AI-driven transformations add further pressure.

A banner on a closed restaurant in downtown Seoul advertising the space for rent. [NEWS1]

The country is nearing the end of its optimal window to reverse course. On May 11, Korea’s five major business associations jointly proposed 100 policy recommendations for the next administration — an unprecedented move that reflects mounting concern. Their message was clear: outdated growth strategies no longer work and fresh approaches are essential. Among their suggestions were nurturing emerging industries, reforming labor markets and adapting to the age of protectionism.

However, presidential candidates have yet to meet the urgency of the moment. Most of their pledges are populist in tone, aimed at short-term voter appeal. But Korea needs candidates who are willing to pursue painful but necessary reforms — especially in industrial restructuring and labor policy — before it is too late.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.