A new economic path: Lessons from the past and a call for structural reform
Published: 04 Jun. 2025, 05:00
Audio report: written by reporters, read by AI
The author is a professor of economics at Dongguk University.
As Korea enters a new political chapter, the state of its economy demands a clearheaded policy direction. The country now faces a dual challenge: a cyclical slowdown and entrenched structural low growth. Textbook economics suggests a two-pronged approach — short-term aggregate demand management to ease the downturn, and long-term structural reform to boost productivity and improve resource allocation.
![Containers are stacked at the Sinseondae port terminal in Busan on April 30. [YONHAP]](https://koreajoongangdaily.joins.com/data/photo/2025/06/04/334853b8-45d7-4e39-b38f-4ceff080031e.jpg)
Containers are stacked at the Sinseondae port terminal in Busan on April 30. [YONHAP]
However, since the 1997 Asian financial crisis, Korea has often prioritized short-term stimulus over deep structural change. The economy’s relative stability over the past two decades owed more to external fortune than domestic reform. Most notably, China’s accession to the World Trade Organization in 2001 spurred an export boom that masked Korea’s underlying weaknesses. Today, with that external tailwind fading, Korea’s true economic capacity is being laid bare. The 0.8 percent growth forecast offered by both domestic and international institutions reflects not a momentary shock but the limitations of an economy without structural support.
A key reason for this diminished potential is the repetitive reliance on short-term stimulus through credit expansion and construction investment. Like a temporary painkiller, these policies have dulled the symptoms without treating the underlying condition. The consequences are now visible: rising household debt, shrinking consumer capacity, soaring real estate prices in the capital region, increased housing costs that discourage marriage and childbirth and deepening inequality.
![Apartment complexes in Seoul are seen from Namhansanseong in Gwangju, Gyeonggi, in March. [YONHAP]](https://koreajoongangdaily.joins.com/data/photo/2025/06/04/620bcd03-ee2a-4da8-9e9a-9af96900826e.jpg)
Apartment complexes in Seoul are seen from Namhansanseong in Gwangju, Gyeonggi, in March. [YONHAP]
Korea’s housing market, inflated by years of speculative demand and policy intervention, exemplifies this imbalance. According to the Bank of Korea, outstanding real estate loans reached 1.93 quadrillion won ($1.4 trillion), accounting for nearly half of all private-sector credit. Since 2014, housing credit has risen by more than 100 trillion won annually — more than doubling in a decade. Predictably, this influx of capital into a constrained market drove prices to unsustainable heights.
Each time prices threatened to fall, policy responses — easing regulations, offering state guarantees and providing additional stimulus — only reinforced public belief that real estate was the most secure investment. Even now, expectations of interest rate cuts, the possibility of another supplementary budget and lingering memories of past housing booms are fueling renewed speculation. The market remains volatile, driven as much by sentiment as policy.
Infrastructure spending has also been a go-to stimulus tool, but Korea must heed the cautionary tale of Japan. In response to its 1990s stagnation, the Japanese government launched nine fiscal stimulus packages totaling 124 trillion yen ($868.5 billion) between 1992 and 2000. Most of the spending went into construction — roads, ports and railways — guided as much by political incentives as economic logic.
The Organisation for Economic Cooperation and Development and the World Bank later described Japan as an "overbuilt state," pointing to public investment that failed to revive demand or transform the economic structure. Nobel laureate Joseph Stiglitz similarly criticized Japan’s public works programs for deepening fiscal deficits while failing to spur innovation or productivity.
By the early 2000s, even Japan acknowledged the limitations of construction-led growth, shifting its policy focus toward research and development (R&D) and technological innovation.
For Korea’s new administration, the policy imperative is clear. First, it must avoid repeating past mistakes. This means halting demand-side stimulus reliant on credit expansion and construction. The planned implementation of the third stage of the debt service ratio stress test in July must proceed as scheduled. Moreover, regional mortgage lending should not be exempt from stricter regulations.
Second, supplementary budgets should target support for vulnerable groups and promote productivity-enhancing investment. The quality — not quantity — of fiscal spending will determine the trajectory of growth. While infrastructure spending may merely prolong a faltering engine, R&D investment offers the opportunity to upgrade it altogether.
Third, regulatory reform is critical to restoring entrepreneurial vitality. Institutional barriers that block new industries or prevent established companies from transitioning must be dismantled. Korea’s economic policy should focus less on flooding the market with liquidity and more on unlocking innovation by removing unnecessary regulations.
![A vacant storefront stands on a street in central Seoul on May 18. [YONHAP]](https://koreajoongangdaily.joins.com/data/photo/2025/06/04/50a22574-bf99-4452-a0bc-716b0ff2b368.jpg)
A vacant storefront stands on a street in central Seoul on May 18. [YONHAP]
To be sure, Korea’s economic history is not one of short-termism alone. The FTA strategy, initiated under President Roh Moo-hyun and carried forward by successive administrations, stands as a rare case of long-term economic vision. These agreements significantly strengthened Korea’s export competitiveness and raised the global standing of its manufacturing industries.
The new government must demonstrate the same strategic foresight. In an era of accelerating global change, Korea can no longer afford to delay industrial restructuring. This moment offers a chance to redefine the nation’s economic direction — not through immediate gains but through policies that will endure.
If the administration succeeds, its efforts may one day be remembered as a turning point in Korea’s economic history.
Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.
with the Korea JoongAng Daily
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