"Is the Miracle of the Han River Over?"... Foreign Media Painfully Point Out South Korea's Growth Limits

FT, Limits of Relying on Cheap Energy and Labor
"Minus Growth of -0.1% in the 2040s"

A painful critique has emerged that the Korean-style economic growth model, which has relied on cheap energy and labor, has reached its limits.

The UK Financial Times (FT) reported this on the 22nd (local time) in an analysis article titled "Is South Korea’s economic miracle over?".

First, FT focused on the 'Semiconductor Mega Cluster' being developed in Yongin with investments from Samsung Electronics, SK Hynix, and others, pointing out that "the Korean government is trying to expand traditional growth engines centered on manufacturing and large corporations, but this reveals a lack of will and ability to reform the exhausted existing model."

While South Korea continues to follow the old growth model that led the past 'Miracle on the Han River,' growth rate forecasts are clearly slowing down. Citing a Bank of Korea report, FT stated, "South Korea grew at an average annual rate of 6.4% from 1970 to 2022, but growth is expected to slow to 2.1% in the 2020s and 0.6% in the 2030s," adding that "in the 2040s, it will enter negative growth at -0.1%."

FT's diagnosis also highlights that even the pillars that have driven economic growth, such as cheap energy and labor, are faltering. The outlet explained that Korea's low electricity rates act as a kind of manufacturing tariff subsidy, with Korea Electric Power Corporation's debt reaching as much as $150 billion (about 206 trillion won). It added that among the 37 OECD member countries, only Greece, Chile, Mexico, and Colombia have lower labor productivity than South Korea.

Professor Park Sang-in of Seoul National University’s Graduate School of Public Administration pointed out Korea's vulnerability in developing new source technologies, stating, "From an external perspective, Korea may seem very dynamic. However, our economic structure, which catches up with advanced countries through imitation, has fundamentally not changed since the 1970s." Among the 120 key technologies selected by the Korean government in 2012, 36 fields ranked first in the world, but by 2020, only 4 fields held the top spot.

Adding to concerns about future growth is the crisis of low birth rates and aging population. FT cited a study by the Korea Institute for Health and Social Affairs warning of this demographic crisis, noting that the working-age population is expected to decrease by nearly 35% by 2050 compared to 2022, leading to a roughly 28% decline in gross domestic product (GDP).

[Image source=Yonhap News]

The outlet noted, "Skeptics warn that South Korea's situation is not favorable in addressing various issues such as plummeting birth rates, an outdated energy sector, and a sluggish capital market," adding, "These conditions do not seem likely to improve in the near future." While various reform measures are urgently needed, the results of this year's general election suggest a deadlock lasting more than three years until the next presidential election in 2027, which also supports these concerns.

Additionally, problems were identified such as conglomerates entering a third-generation management system shifting from a 'growth mindset' born out of past scarcity to a 'status quo mindset' leading to complacency; the lack of investment capacity in small and medium-sized enterprises (SMEs) that account for over 80% of employment due to a conglomerate-led economy; and the deepening inequality between large corporations and SMEs.

FT expressed concern, stating, "Many profits of major large corporations featured in headlines come at the expense of domestic subcontractors facing price pressures," and "The two-tier economic system, where large corporations employing 6% of Koreans account for nearly half of South Korea's GDP, is causing social and regional inequalities."

Other concerns for the Korean economy include particularly high household debt levels among developed countries and elderly poverty rates. Seungheon Song, a partner at consulting firm McKinsey, warned, "There is a risk of falling into a vicious cycle."

However, FT also introduced arguments that this pessimism about the Korean economy is excessive. Unlike Korea, many Western countries that abandoned advanced manufacturing now regret it, and the technological competition between the U.S. and China could work to Korea's advantage. If U.S. restrictions limit Chinese semiconductor, battery, and bio companies' access to Western markets, Korea is expected to benefit. There is also potential for a windfall due to security concerns arising from cross-strait tensions.

Some expect that the upcoming era of artificial intelligence (AI) will provide solutions for Korea, which faces growth limits. Jeong In-seong, author of "The Future of the Semiconductor Empire" and former SK Hynix executive, told FT, "By maintaining cutting-edge semiconductor production, Korean companies can reap more benefits from future innovations in the AI field."

FT reported, "Korean companies demonstrate superior capabilities compared to Western companies in various sectors such as defense, construction, pharmaceuticals, electric vehicles, and entertainment in Southeast Asia, the Middle East, and South America," and suggested that if various reforms are achieved, there is potential for a resurgence.

Choi Sang-mok, Deputy Prime Minister and Minister of Economy and Finance, emphasized to FT, "Dynamism is inherent in the Korean DNA," adding, "While there is a need to redesign policies to unleash economic dynamism again, the miracle is not over."