[2025 Financial Forum] Jaewon Lee, Head of BOK Economic Research Institute: "This Is the Golden Time... Policy Focus Must Shift to Structural Reform"

2025 Asia Financial Forum Special Lecture
Unprecedented Speed of Aging
Constraints on Growth Potential, Fiscal Sustainability, and Monetary Policy
"Structural Reform Is the Only Solution... We Must Resist the Temptation to Solve Everything with Money"

"We are experiencing unprecedented aging in terms of speed, but we still have time to respond. This is the golden time. It is time for determination and action."

Jaewon Lee, President of the Economic Research Institute at the Bank of Korea, is attending the "2025 Asia Financial Forum" hosted by Asia Economy at the Westin Chosun Seoul in Jung-gu, Seoul, on the 21st, delivering a special lecture on "Korean Economic Growth and Structural Reform."

Jaewon Lee, President of the Economic Research Institute at the Bank of Korea, stated this during a special lecture on "Korean Economic Growth and Structural Reform" at the "2025 Asia Financial Forum" held at the Westin Chosun Seoul in Jung-gu, Seoul, on the 21st. He emphasized that "the policy focus should shift from the short term to the mid- and long term, and from economic stimulus to structural reform."

Unprecedented Speed of Aging... Constraints on Growth Potential, Fiscal Sustainability, and Monetary Policy

Korea achieved rapid and significant economic growth, but as the economy matured, it entered a phase of low growth. The potential growth rate continues to decline. Lee pointed out, "The speed at which our country's growth rate is falling is much faster compared to other major global economies. In the early 1990s, the growth rate was around 9%, but now many believe the potential growth rate is below 2%," adding, "Most expect that within the next 20 to 30 years, Korea will enter a zero-growth phase, and there are even concerns about the possibility of negative growth."

Lee identified the demographic change, which is particularly severe in Korea, as a representative and complex cause of low growth. He said, "Korea is experiencing aging at a pace that is unprecedented both globally and historically." In December last year, the proportion of the elderly in the total population exceeded 20%, marking Korea's entry into a super-aged society. There are projections that by 2070, the elderly will account for about half of the total population. The population structure is expected to take on a typical inverted pyramid shape, with the working-age population shrinking relatively. Such a demographic structure will place a significant burden on Korea's economy and welfare system overall.

Lee cited increased life expectancy due to advances in medical technology and declining birth rates as the causes of rapid aging. Korea's total fertility rate last year was 0.75. He explained, "About 30% of the increase in life expectancy can be attributed to improved medical technology, while the remaining 70% is due to Korea's low birth rate trend," adding, "The current total fertility rate is not only far below the global average of 2.3, but also about half the OECD average of 1.58, which is extremely low."

He continued, "There are numerous prior studies on why Korea's birth rate is particularly low, but according to a 2023 report by Bank of Korea researchers, the ultimate reason is economic." He identified job insecurity, intensified competition due to population concentration in the Seoul metropolitan area, rising child education costs, and increasing housing prices as the main factors delaying marriage and childbirth. Other research using different methodologies also shows that in regions with higher population density, young people's competitiveness increases, but birth rates drop further and housing prices rise.

Jaewon Lee, President of the Economic Research Institute at the Bank of Korea, is attending the "2025 Asia Financial Forum" hosted by Asia Economy at the Westin Chosun Seoul in Jung-gu, Seoul, on the 21st, delivering a special lecture on "Korean Economic Growth and Structural Reform."

The reason why population decline must be addressed at the national level is that it reduces growth potential. Lee explained, "Not only does the working-age population decrease, but aging also leads to productivity declines, both of which can negatively affect growth potential." He added that this poses a major challenge to the sustainability of government finances and imposes structural constraints on monetary policy. In an aging society, the ability to respond to business cycles diminishes, negatively impacting social welfare. Issues such as elderly poverty can also arise.

Lee stated, "Some argue that, from a per capita GDP perspective, population decline might actually be beneficial, but this view oversimplifies reality," adding, "Korea's entire economic system and social welfare framework are designed based on a certain population size and growth, so if there is a high likelihood of rapid population decline, it becomes problematic."

He explained, "As aging progresses, costs for health insurance, pensions, and care services increase, causing government debt as a percentage of GDP to rise rapidly. The government will have no choice but to continue issuing bonds to finance these fixed costs." Lee pointed out, "Assuming government debt starts at zero, demographic changes alone would push government debt to 120% of GDP by 2060. According to the National Assembly Budget Office, if current trends continue, government debt will exceed 180% of GDP in 50 years." If left unaddressed, this will become a burden for the next generation.

He also explained that short-term fiscal policy will inevitably be affected. Fiscal capacity for other areas, such as infrastructure and education, will shrink. Even if the same amount of money is spent, the resulting effects will diminish. Lee said, "In an aging society, the effectiveness of fiscal policy decreases even if government spending is increased through expansionary fiscal policy." He also diagnosed that structural constraints on monetary policy due to aging are unavoidable. He said, "In an aging society, investment demand declines while savings, which supply funds, increase. As a result, in a low-interest-rate environment, the central bank's ability to lower rates and supply liquidity during a recession is reduced." If this situation becomes extreme, the central bank could lose its ability to ensure price stability, one of its most important roles, and fail to control inflation. He added, "When government debt increases, inflationary pressure intensifies, and even if the central bank tries to raise interest rates, the cost of financing government debt rises, leading to more debt, which in turn creates a dilemma by further fueling inflationary pressure."

Jaewon Lee, President of the Economic Research Institute at the Bank of Korea, is attending the "2025 Asia Financial Forum" hosted by Asia Economy at the Westin Chosun Seoul in Jung-gu, Seoul, on the 21st, delivering a special lecture on "Korean Economic Growth and Structural Reform."

"Structural Reform Is the Only Solution... We Must Resist the Temptation to Solve Everything with Money"

Lee stressed that "structural reform is the only solution" to these problems. In particular, he saw easing the concentration in the Seoul metropolitan area as key in the context of population decline due to low birth rates and aging. Lee said, "The most important factor that led to ultra-low birth rates is population concentration in the Seoul metropolitan area," adding, "According to a Bank of Korea report, simply lowering Korea's urban population concentration to the OECD average would raise the birth rate by 0.414. This means the current birth rate (total fertility rate of 0.75) could be increased by more than 50%, which is a significant effect."

For balanced regional development, Lee explained that, as previous Bank of Korea research has shown, "nurturing key cities outside the capital region" and "reforming the university admissions system to strengthen regional selection" would be effective. He said, "Investing evenly across all regions reduces effectiveness, so it is necessary to strategically foster four to six key cities. This has been shown to have positive effects not only on those cities but also on surrounding areas." He added, "It is also necessary to reform the admissions system to disperse competition regionally."

He also said that the participation rate of women and the elderly in economic activities must be increased. This is not only highly effective in the short term but also enhances sustainability in the mid- to long term. Lee noted, "The economic participation rate of women is still much lower than the OECD average," and emphasized the need to actively utilize flexible work arrangements, parental leave policies, and the creation of care infrastructure. Regarding increasing the economic participation rate of the elderly, the Bank of Korea recently proposed "rehiring after retirement" accompanied by wage system reform. He explained, "This would have a significant effect on employment and economic growth, and would also have positive effects on elderly poverty, quality of life, and the sustainability of pensions."

Lee emphasized, "It is not too late. What we do from now on is crucial." According to joint research by the International Monetary Fund (IMF) and the Bank of Korea, due to population decline, the annual economic growth rate will be reduced by 0.67 percentage points each year from 2023 to 2050. For example, if the economy could grow by 2% annually, population decline would lower this to 1.33%.However, increasing the economic participation rates of women and the elderly could offset about one-fifth of the lost growth, and improving productivity through more efficient resource allocation within sectors could reduce it by another third. If productivity is further increased by leveraging artificial intelligence (AI), the negative impact of population decline could be fully offset, potentially resulting in positive growth rates."

He cautioned against "the temptation to solve everything with money." He said, "There will be temptations and pressures to stimulate the economy through expansionary fiscal or monetary policy, but this is a very misguided prescription. Providing liquidity has nothing to do with our growth potential or structural problems; it only serves as a temporary painkiller." In the mid- to long term, he said, it would only exacerbate structural problems. He pointed out, "Increasing the money supply may temporarily boost GDP, but the effect disappears within one or two years, leaving only inflation, asset bubbles, and asset inequality."

Lee stressed, "The most important thing for policymakers is to distinguish the causes of low growth by sector and first determine whether they are structural or cyclical. Short-term fiscal or monetary policy should only be applied to cyclical factors."

Jaewon Lee, President of the Economic Research Institute at the Bank of Korea, is attending the "2025 Asia Financial Forum" hosted by Asia Economy at the Westin Chosun Seoul in Jung-gu, Seoul, on the 21st, delivering a special lecture on "Korean Economic Growth and Structural Reform."