Heavily indebted Korea at risk of recession, warns Atif Mian

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Heavily indebted Korea at risk of recession, warns Atif Mian

Published: 16 May. 2025, 07:00 Updated: 16 May. 2025, 09:35

Audio report: written by reporters, read by AI

Atif Mian, an economics professor at Princeton University, speaks during an interview with the JoongAng Ilbo at Yonsei University in western Seoul on May 8. [KIM HYUN-DONG]

Korea is at risk of falling into a recession, precipitated by an economic downturn stemming from soaring household debt and weak consumer spending, warns Atif Mian, an economics professor at Princeton University.

The professor, who authored critically acclaimed books like “House of Debt,” said that an economy heavily reliant on debts is destined to face a slowdown in growth, although it could slip away from the state defined as a recession.

“But the more important point is that even if you can avoid a financial crisis, too much dependence on household debt will ultimately lead to a slowdown in growth, which is what happened in the U.S.,” the economist told the JoongAng Ilbo on May 8 as he visited Korea on the event of receiving an award from Yonsei University.

“So if you look at Korea, both Korea and China, I would say both of these countries fall into the kind of household credit growth that we have only seen in some of the countries in the past, big booms in private household credit like the United States in the early 2000s and we know from those episodes that none of those episodes ended well,” he said, noting that both countries have seen household debts grow at a rapid pace since the 2008 economic recession.

Even if a country avoids a recession, the excessive growth of debts tied with house purchases could lead into other housing-related crises as shown in China.

“Household debt has to slow down, and whenever it does, just like recently happened in China, with the Evergrande firm going bankrupt and other housing related crises, growth has slowed down significantly in China. I have similar worries for Korea as well. And growth has already slowed down in Korea as well,” Mian said.

To foster a more sustainable economy, restoring domestic consumption is the key, according to the economist.

“So, I think the key challenge for countries like Korea is to boost domestic consumption in the private sector so they do not have to rely on fiscal spending to generate demand,” he said.

He acknowledged, however, that Koreans' purchasing power has been significantly constrained by the financial strain of servicing housing-related debt.

“I think buying a house needs to be more affordable so they have more disposable income to boost consumption in other segments of the economy, so expenditure on the service sector can expand,” he said, citing leisure activities — like watching opera — and childcare-related activities as an area that deserves more spending.

Mian went on to warn that relying on government spending is not a sustainable solution, citing Japan as a cautionary example.

“You are very often forced to rely on fiscal spending because you're unable to boost private consumption by itself. This is the trap that Japan fell into as well, and so they have had to sort of continuously rely on fiscal spending to boost demand, because there's not sufficient private demand,” he said.

The best solution, he said, should follow a two-pronged approach: increasing housing supply and imposing taxes aimed at curbing excessive real estate price hikes.

“The best way to do it, in terms of the empirical evidence that we have, is to expand the supply of housing as aggressively as you can,” Mian said.

“The other solution to this problem is that you discourage people from just gaining too much in form of capital gain on existing housing, and that involves charging user cost or land tax on existing housing. So maybe one way to discourage too much appreciation of existing housing value is to tax properties a bit more through land taxes, number one and number two,” he said.

Aware of potential backlash against the levies, he called for a shift in perception toward taxation.

“But I always want to think of these taxes in a revenue neutral way,” he continued, “So I would favor on the margin, raising taxes on property or land, so to speak, the underlying land value, but then using that revenue to lower income taxes, especially on young people, on young families to bring more in balance your affordability, because it will reduce the price of existing housing and raise the income potential of a young family so they can afford the same house without relying on as much debt like that's what you're trying to do.”

BY KIM KYUNG-HEE [[email protected]]