[Economy Pulse] Creative Destruction for Innovation Amid Demographic Crisis

At a forum discussing demographic issues faced by both South Korea and Japan, I heard an interesting point from a Japanese scholar. From Japan’s perspective, South Korea is seen as a country that actively pursues innovation, whereas in Japan, social demand for innovation has significantly declined compared to the past. When I asked about the reason, he pointed directly to population aging. As the elderly population has increased, interest in change has diminished.

As of 2024, South Korea ranks sixth in the Global Innovation Index. The country’s research and development expenditure is about 5% of its gross domestic product (GDP), which is twice the OECD average and among the highest in the world. In contrast, Japan, which ranked ninth in 2007, fell to sixteenth place by 2020. This decline is a key background to Japan’s prolonged stagnation after being considered the world’s top innovator in the 1990s.

It is unlikely that Japan’s decline in innovation is due solely to population aging. Nevertheless, it is noteworthy that while Japan’s innovation index ranking was falling, the proportion of the population aged 65 and older surged from 20% in 2005 to 30% in 2025. Currently, South Korea’s elderly population ratio stands at 20%, the same as Japan’s twenty years ago, but the pace of aging in Korea is twice as fast as in Japan. By 2035, the proportion of elderly people is expected to reach 30%. Over the next ten years, the population aged 65 and older will increase by 4.8 million, while the population in their 20s and 30s will decrease by 2 million. If this trend continues, South Korea’s innovation engine may rapidly fade, just as it did in Japan.

The shortage of young talent is already becoming apparent. According to a report by the Korea International Trade Association, there will be a shortage of about 60,000 professionals in four key advanced technology fields-AI, cloud computing, big data, and nanotechnology-by 2027. To make matters worse, the outflow of highly skilled domestic talent overseas has intensified, causing South Korea’s brain drain index to plummet to 36th in the world in 2023. Even if the government pours massive budgets into AI, without talent to drive innovation, it is nothing but a sandcastle.

The shortage of talent is also due to the failure of the education system. Education in South Korea has long since become merely a means of gaining university admission, rather than nurturing future talent. With all the top students aspiring to enter medical school, it is difficult to expect future innovation. Successive governments have pledged education reform to address this, but each time, they merely changed the college entrance system and failed. Now, creative destruction in education is needed.

For innovation to succeed, the role of the market is also crucial. A recent OECD report assessed that while South Korea’s investment in research and development for innovation is strong, commercialization and the spread of new products are seriously lacking. Innovative ideas are meaningless if they remain only in academic discussions. Only through commercialization can industrial value be realized and play a substantial role. Realizing industrial value is the driving force of growth, leads to better treatment of innovative talent, and can prevent brain drain. The key factor hindering the realization of industrial value is regulation. For the government’s all-out push for AI innovation to succeed, creative destruction of regulations is essential.

If a society does not open up to and allow new ideas and change, innovation will have no place to take root. In the process of rapid industrialization, South Korea has become a very rigid society. Major social groups-politics, labor, universities-cling to vested interests and rigid systems, resisting change. This year’s Nobel Prize winners in Economics said that societies that allow openness and change foster ‘creative destruction.’ In this era of rapid demographic change, for South Korea to nurture future talent and secure national sustainability through innovation, creative destruction is needed in education, market regulations, vested interests, and institutions.

Hong Seokcheol, Professor of Economics, Seoul National University