[Insight & Opinion] Politics in Crisis Ignoring the Sustainability Crisis

South Korea's gross domestic product (GDP) growth rate is expected to decline by about 1 percentage point from 2.6% last year to around 1.6% this year. Considering the potential growth rate of around 2%, a 1.6% growth rate is not particularly surprising. The problem is that a growth rate in the 1% range in 2023 is a serious signal indicating that the Korean economy is entering a 'sustainability crisis.' Signs are emerging everywhere that the 'Miracle on the Han River,' achieved through economic development over the past 60 years, can no longer continue.

The economically active population has decreased by 700,000 over the past two years, and it is estimated to decline by 1.5 million by 2026 and 2.87 million by 2030 compared to 2022. The scale of manufacturing facility investment was only 15% in 2021 compared to 2015. Excluding the semiconductor industry, it decreased by a staggering 26%. Since facility investment decreased in 2022, the statistics for 2022 would show an even greater decline. Aside from labor and capital, the part that can increase the economic growth rate is total factor productivity, which reflects the overall system efficiency of the economy. According to recent research by the Bank of Korea, total factor productivity declined due to the COVID-19 shock, and especially according to a survey by the Federation of Korean Industries, South Korea's total factor productivity is only about 61% of that of the United States.

The foundation determining total factor productivity is various economic operating systems and technological innovation. Since economic operating systems are determined by various laws and practices, the most important institution in determining total factor productivity is the National Assembly, which makes laws. If the National Assembly does not continuously improve the economic operating system, total factor productivity cannot increase. The way politics contributes to economic growth is by reforming the innovation ecosystem to promote productivity improvement and actively responding to contemporary challenges such as aging population measures, thereby giving hope to the people.

Another fact to note is that serious changes are underway in the world's geopolitical structure and the framework of global trade. The era of shared prosperity, which enabled high growth and price stability in the world economy for 20 years, ended due to the COVID-19 pandemic, last year's Ukraine war, and inflation shocks, and is being reshaped by new Cold War and nationalist selfish competition. As a result, global supply chains are fragmented, and trade growth is shrinking. The Chinese economy, which has served as the growth engine of the global economy, has inevitably suffered serious damage, casting a dark shadow over the Korean economy, which depends on China for 30% of its export market.

How is the political sphere responding to these changes in the geopolitical economic structure? In August last year, the U.S. Congress enacted the CHIPS Act and the Inflation Reduction Act, and Japan also enacted the Economic Security Act. In particular, while the U.S. CHIPS Act provides a 25% tax credit on investment costs, our National Assembly only raised the investment tax credit rate for national advanced industry facility investments from 6% to 8%. The 21st National Assembly submitted a total of 83 bills related to polarization, but only 15 minor bills were passed, and key bills such as tax reform have not even been touched. The pension reform bill was handed over to the government. Perhaps the internal power struggles and fierce party conflicts leave no room to focus on contemporary challenges.

The sustainability crisis facing the Republic of Korea is a race against time. The more the political sphere ignores responses to contemporary challenges, the lower the growth potential becomes, while the crisis situation grows more severe. Despite this urgent need, the political situation, which is descending into a destructive fight, can be said to be the 'sustainability crisis' itself.

Kim Dong-won, Former Visiting Professor at Korea University