[Opinion] Is the South Korean Economy Fundamentally Strong?

When discussing the potential crisis in the Korean economy, policymakers always claim that the fundamentals are strong and there is no problem. Professors Carmen Reinhart and Kenneth Rogoff of Harvard University criticize this assertion in their book This Time Is Different. They argue that although people say "this time is different because we are well prepared," the reality is that the risk remains. What exactly are the fundamentals of an economy? Are the fundamentals of the Korean economy truly strong?

Economic fundamentals are assessed through macroeconomic indicators such as economic growth rate, inflation, fiscal balance, current account balance, short-term external debt, and foreign exchange reserves. Korea has revised its growth rate upward to 2.6% this year, and inflation has recently dropped to 2.9%. The current account surplus is expected to exceed $60 billion, and the proportion of short-term external debt in total external debt has decreased to 21%. The fiscal deficit stands at 3.9% of GDP, and foreign exchange reserves amount to $413 billion. From the perspective of macroeconomic indicators, there seems to be no major problem, but the exchange rate, which reflects the country's economic risk, has risen by more than 30%. Unlike global stock prices, Korean stock prices have not risen as much, and there is a Korea discount phenomenon where domestic investors prefer overseas stocks. Additionally, living costs have risen significantly, revealing many latent problems in the fundamentals.

First, there is the weakening of industrial competitiveness and the low birthrate issue. With China gaining technological superiority over Korea, Korea's key industries are losing competitiveness. Currently, the worsening trade balance with China is offset by a trade surplus with the United States, but if the U.S. strengthens protectionism, the trade balance could soon deteriorate. Moreover, this surplus is a recession-type surplus, as imports have decreased more than exports due to the economic downturn, increasing the surplus margin. The weakening industrial competitiveness reduces jobs and raises youth unemployment. Together with the birthrate, which has fallen to 0.76 children per woman, this could entrench low growth.

Domestic demand stagnation and increasing financial distress are also important. Although growth rates have been revised upward due to increased exports, domestic demand remains in a slump. Due to the rigid enforcement of the 52-hour workweek system, restaurants and coffee shops in the city stop taking orders from 8:30 p.m., and city traffic is already sparse by 8 p.m. Consumption and economic vitality are declining. Domestic demand stagnation leads to financial distress. Real estate project financing (PF) delinquency rates are already rising, and there are concerns that household debt defaults will increase significantly due to high interest rates. Living costs are also rising. Although the consumer price index shows only a 2.9% increase, the prices of daily necessities and foodstuffs that people actually feel have risen sharply. Since 2021, the cumulative consumer price index has increased by 12.8%. The rise in living costs is worrisome because, with a time lag, it leads to wage increases, creating a vicious cycle of rising wages and prices.

Political instability is another factor worsening the fundamentals. Despite the opening of the 22nd National Assembly, the public has lost hope, knowing that partisan conflicts will continue rather than efforts to revive the people's economy. Furthermore, as seen in the recent medical resident strike, institutional reforms are difficult due to opposition from interest groups. With aging, digitalization, and the rise of the Chinese economy weakening the competitiveness of key industries, the Korean economy requires new laws and systems. However, as institutional reforms decided by the National Assembly become more difficult, the future of the Korean economy looks bleak.

In light of this, it is premature to be reassured that the Korean economy is strong based on a few macro indicators. In the long term, policies to increase the birthrate and strengthen industrial competitiveness through new industry policies are necessary. In the short term, domestic demand must be stimulated to prevent financial distress, and to lower living costs, agricultural imports should be expanded and distribution logistics information digitized to reduce excessive distribution margins. Additionally, to overcome opposition from interest groups to institutional reforms, policy promotion should be strengthened to increase public support for economic policies. Policymakers must identify latent fundamental risks and actively implement measures to prevent the Korean economy from experiencing a crisis.

Kim Jeongsik, Professor Emeritus, Department of Economics, Yonsei University