ECONOMY, "South Korea is on the path to extinction"...OECD's 'shock warning'
11 July, 2024
Written interview with OECD Economic Affairs Officer for Korea
- "Korea's declining birthrate, a major threat to the country"
- "Work-life balance is out of whack, wage gap between large and small companies should be reduced"
- "Reducing inheritance tax alone won't solve Korea's economic problems"
The Impact of the Declining Birthrate on South Korea
Jørn Pareliussen, OECD Economic Affairs Officer, sounds the alarm: South Korea's plummeting birth rate isn't just an issue; it's a crisis with deep historical roots. He points out that South Korea's obsession with production at the expense of consumption has skewed work-life balance so badly that the country's fertility rate dropped to a dismal 0.72 children last year, one of the lowest globally. If this trend continues, the elderly population will balloon to nine times the size of the younger generation, wreaking havoc on the labor market and draining government finances.
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| Jón Pareliussen, OECD Economic Affairs Officer for Korea and Sweden Photo/OECD |
Need for Structural Reform
Pareliussen doesn't mince words about the need for structural reforms. He stresses that fixing the work-family imbalance and narrowing the wage gap between large corporations and small businesses are crucial steps to tackling the declining birthrate. In response to questions about the necessity of increasing tax revenues to cope with the exploding government spending due to an aging population, he bluntly states that the most crucial measures are boosting labor force participation and delaying retirement. "Raising taxes could be an option," he adds, highlighting the meager value-added tax (10%), which is merely half the OECD average.
Korea Discount and Inheritance Tax
Pareliussen dismisses the notion that simply reducing inheritance tax will resolve Korea's economic woes. "Lowering the tax rate or expanding the tax base won't cut it," he asserts. He identifies tunneling behavior—where profits are shifted to internal transactions—as a major factor behind the Korea discount, and he fully backs any reform aimed at curbing this practice.
National Pension Reform
When it comes to national pension reform, Pareliussen pulls no punches. He argues that the pension age in South Korea, currently the lowest among OECD countries at 63, should be raised further and adjusted according to life expectancy. He also points out that the current premium rate of 9% and income replacement rate of 40% are both below OECD averages, necessitating increases to reduce elderly poverty and ensure pension sustainability. Regarding the basic pension provided to the lowest 70% of income earners over 65, he recommends increasing the amount for low-income pensioners.
South Korea's Economic Outlook
The OECD's forecast for South Korea's economic growth this year is 2.6%, a slight improvement of 0.4 percentage points from February's forecast of 2.2%. The inflation rate is expected to be 2.5%, down by 0.1 percentage point from May's estimate of 2.6%.
Pareliussen's take on domestic demand is cautiously optimistic. He notes that while domestic demand likely expanded in the first quarter, it weakened somewhat in the second quarter. However, he anticipates stronger consumption in the latter half of the year due to slowing inflation and peaking interest rates. As for the Bank of Korea's (BOK) rate cut trajectory, he speculates that a rate cut could occur next month but clarifies that it's not the primary scenario. He predicts that the rate will remain steady until the end of this year, gradually declining to 2.5% by mid-2025.
In its latest monetary policy direction meeting, the Bank of Korea decided to maintain its benchmark interest rate at 3.50% per annum, marking the 12th consecutive rate hike since January last year.