Korea Inc. faces demographic cliff
Outdated economic structure, rigid labor market also picked as top economic problems
Economists and analysts have picked Korea’s demographic change as the country’s biggest economic problem, describing it as a time bomb waiting to explode and drag down Asia’s fourth-largest economy.
Upon its 67th anniversary, The Korea Times surveyed 20 economists and analysts, asking them to name the most worrying and chronic problems that could halt Korea’s future growth.
Unlike views from outside the country, most respondents did not pick external factors such as threats from North Korea. Rather, they mentioned more internal problems, such as the aging workforce, outdated economic structure and rigid labor market, warning that some of these should be urgently tackled.
Graying Korea
Out of the 20, eight pointed to a reduction in the country’s population — it is marching toward a demographic cliff.
According to the Bank of Korea (BOK), the country’s birthrate was at the world’s lowest at 1.17 last year.
Next year, the country will be regarded as aged-society as its elderly population — those aged 65 or older — is expected to account for 14.3 percent of the population, surpassing the 14 percent mark for an aged society. In 2025, Korea’s elderly population will rise to over 20 percent, labeling the country as a super-aged-society.
The problem is the speed of aging. Korea became an aging society in 2000 after its elderly population accounted for 7 percent of the population. It took 18 years for the country to become grayer — aging to aged — much faster than Japan at 24 years; Germany, 40 years; Italy, 61 years; and the United States at 73 years.
The seven-year period before Korea transitions from an aged to a super-aged society is also the fastest among the aforementioned countries.
The BOK said such a fast aging trend will lead the country’s economic growth to almost zero in the next 10 years. It predicted the growth rate of the country’s gross domestic product will slow to 1.9 percent between 2016 and 2025 and then to 0.4 percent between 2026 and 2035.
“The aging issue is really serious,” Prof. Yun Chang-hyun at the University of Seoul said. “The trends of a low birthrate and an ageing society become very distinct. But the country is still complacent in preparing for a super-aged society.”
Jones Lang LaSalle Korea Representative Director Lee Han-kook said the demographic cliff will bring a huge decline in the workforce because the total population will shrink.
The United Nations estimated that Korea’s population will decline from 50 million in 2015 to 3.9 million in 2070.
“Under such circumstances, Korea will lack new economic momentum,” Lee said.
BOK Economic Research Institute head Sohn Wook said: “The government’s measures for the aging society seem to be insufficient. Given that it takes one generation, or 30 years to have a tangible outcome from a low birthrate and aging policies, the absence of continued efforts will bring about a negative outcome in the future.” Sohn said. He did not participate in the survey, though.
Legacy of old days
Those surveyed gave seven votes to the issues of Korea’s conglomerateand manufacturer-centric economic structure, low labor flexibility and poor utilization of its labor market.
While making rapid growth after the 1950-53 Korean War, the theory Korea resorted to was trickle-down economics, in which the profits from “well-nurtured” conglomerates and the rich move down to small businesses and the poor. In the process, benefits were given to everybody.
However, experts agree that such an effect never existed.
Samsung Electronics continues to shatter its own record-high profits and sales, lifting its market cap to reach 400 trillion won last month — 25 percent of the 1,600 trillion-won valuation of the main KOSPI bourse — but that does not guarantee its affiliated or partnered firms enjoying little crumbs.
For example, analysts talk about the KOSPI’s recent surge and mediocre movement of the secondary KOSDAQ bourse, on which many of Samsung-related small firms are listed.
“Korea’s fundamental problem lies in its economic structure,” Konkuk University professor Choi Pae-kun said. “We need to create new revenue sources for companies and reform our economic structure. As the country keeps failing to achieve them, the quality of jobs are going from bad to worse and economic growth will slow down.”
Prof. Ha Joon-kyung at Hanyang University said the issues of the conglomerate-centric structure and rigid labor market are linked. “When you look into the business ecosystem of Korea, firms are trying to exploit its vested interests. Workers are also doing the same thing because the country’s labor market is rigid,” Ha said.
“Let’s say a group of workers have gone out on strike,” professor Kang Sung-jin at Korea University said. “The company will try to find a substitution workforce — whether it is temporary or not — to keep the factory running during the workers absence, but that is too difficult in Korea. It is good for workers, but not for young jobseekers.”
Old engine
Experts also said that Korean industries no longer have a growth engine or competitive edge over its rivals. Five experts picked lack of competitiveness and ideas for new growth as problems for the Korean economy.
“Korea’s core industries have been falling apart after losing their competitiveness,” professor Lee Phil-sang at Seoul National University said.
Sogang University professor Kim Young-ick pinpointed Korea’s materials industry, which has lost its competitive edge to its rivals in Japan and contributes to a significant portion of Korea’s trade deficit with Japan.
From 2011 to 2015, Korea suffered consecutive losses in trades with Japan, before turning to a surplus last year.
Also in the survey, four experts picked Korea’s high reliance on foreign economies and lack of discretion in making an economic drive as the biggest problems.
Polarization and the imbalance between economic players got three votes, respectively. The country’s debt-led growth and consequent surge of household debt were also mentioned by three economists.