Magic numbers for Korea’s long-term prosperity

Korea’s economic miracle comes of age. According to U.S. economist Paul Krugman, Korea’s small open economy has entered a low-growth phase owing to the country’s heavy reliance on exports, and negligence in fostering domestic demand and curbing population decline.

Indeed, the current stagnant economy is likely to be a long-term trend, not a cyclical phenomenon. Two numbers — a 5.6 percent growth rate and a 2.1 percent fertility rate — are the key for economic revival.

The McKinsey Global Institute (MGI) estimated that for South Korea to reach Japan’s current GDP per capita of $44,600 by 2020, its GDP would have to grow by around 5.6 percent per year.

However, such a growth rate is almost impossible under the current economic model in Korea. The Bank of Korea and other economic institutes project a growth rate below 3 percent next year.

Korea’s 1.23 fertility rate, one of the world’s lowest, will stunt the growth. According to The Economist’s “Megachanges: The World in 2050,” 2.1 is the replacement rate of fertility, that is, the magic number at which a population exactly reproduces itself. Thus, unless the Korean fertility rate reaches 2.1, Korea’s economy will remain muted and slow. Korea’s demographic inertia will surely sap its economic vitality.

The fast-aging population may also dampen the country’s potential for growth. According to The Economist, “South Korea’s old-age dependency ratio — the proportion of the population aged 65 and over compared to those of working age — is expected to soar 400 percent by 2050.”

The Center for Strategic and International Studies in Washington estimated that by 2050, “38 percent of South Koreans will be over 65, only a whisker below the 39 percent figure projected for those renowned champions of long lives and few babies, Italy and Japan.” It said that “In the United States, by contrast, the percentage of seniors is likely to be 20 percent while in Germany, it is 31 percent. South Korea stands little chance of climbing the economic ladder if it continues to mint more retirees but few babies.” It also added: “The nation badly needs to encourage more participation of women in the workforce. Too many talented women are left in the kitchen.”

One way to address the fast-aging population, and consequently, revitalize the economy, is to implement a proactive immigration policy. Like the U.S., Korea needs to regard immigrants as assets, not liabilities, for economic dynamism. Another possible solution to this issue is to develop a proactive welfare policy that includes hiking the birth rate as a goal.

The recently culminated London Olympics was a significant morale booster to Koreans. As is well known, Korean athletes won 13 gold medals and 28 medals in total, placing the country fifth and ninth, respectively, among the 204 participating countries. Team Korea exceeded its “10-10” goal, namely to place in the top 10 by winning 10 gold medals. This overachievement illustrates how crucial it is in Korean society to set and work toward a goal.

In a similar vein, Korea has become the only country to achieve both industrialization and democracy in just two generations. The so-called “Miracle of the Han River” became possible partly because of a well-designed economic development program.

Then, why did Korea stop setting economic goals for its future? The government has said that a five-year economic development plan, which was suspended in the early 1990s, is a practice only of socialist countries. Although the country may not need such an economic development program, it still needs a visionary national leader and dedicated technocrats capable of guiding the country.

Korea has lost sight of the long-term strategy that served its economy well for the past six decades. Instead, recent presidents have gone off on ad hoc economic adventures. They struggled to chart short-term tactics.

The three leading presidential candidates — conservative Park Geun-hye and liberals Moon Jae-in and Ahn Cheol-soo — competitively vow to tame conglomerates and expand welfare. Yet none of them have outlined their visions for the nation’s long-term growth. They are in a negative campaign mode. They still believe that the president should exercise his or her discretionary power to isolate the strong and the recalcitrant.

According to Song Byoung-jun, president of the Korea Institute for Industrial Economics and Trade, Korea needs to manage its economy well; otherwise, it will fall from 12th to 20th place in terms of GDP. Indeed, instead of trumpeting the nation’s credit-rating upgrade and blaming Korea’s anemic economy on the EU crisis, Korean policymakers should chart plans to reverse the structural economic downturn.

Chae Wook, president of the Korea Institute for International Economic Policy, said that solutions must be long-term, consistent and fundamental: “A stopgap stimulus package will only distort the economy. A bold deregulation of the unproductive and underutilized services market is needed in order to stimulate domestic demand.” Meanwhile, Hyundai Research Institute President Kim Joo-hyun identified the overleveraged household debt, the moribund housing-market slump and sluggish corporate investment as areas for immediate policy attention.

Whoever wins the presidency will face a tough time as he or she will take an oath next February — a time when the economy is predicted to be at its lowest point. One of his or her more significant challenges is the lack of short-term magic solution to the economic inertia. As long as the public debate focuses on egalitarianism, the next administration will have few tools to stimulate the economy.

Korea needs a long-term solution for its long-term sustainable growth, but the people will be clamoring to see an immediate, dramatic breakthrough. This public impatience will be a dilemma for the next president.

Without an annual growth of 5.6 percent, Korea would never overtake Japan’s economy. Without hiking the birth rate up to 2.1, the economy will lose its vitality and head for a downward path.

Lee Chang-sup is the executive managing director of The Korea Times. Contact him at editorial@koreatimes.co.kr. <The Korea Times/Lee Chang-sup>