[Editorial] Path to growth

The government's Economic Growth Strategy for the Second Half of 2026, announced on Tuesday, is filled with rosy projections.

It raised its forecast for this year's real GDP growth from 2 percent to 3 percent and projected nominal GDP growth of 12.3 percent, the highest rate in three decades.

Emboldened by the recent growth trend, the government unveiled its "3-4-5 Vision," aiming to raise Korea's potential growth rate to 3 percent, make it one of the world's four largest exporters and lift per capita gross national income to $50,000.

The optimistic growth outlook is based on the semiconductor boom, rising exports and the expected boost from fiscal spending financed by additional tax revenue. Among these, the artificial intelligence-driven semiconductor boom is the key factor behind the upward revision of the growth outlook.

However, semiconductor prices and global AI investment trends are external factors largely beyond the government's control. If the semiconductor supercycle loses momentum earlier than expected, investment and fiscal plans built on that premise could face setbacks.

Even if South Korea achieves 3 percent growth this year, there is no guarantee it can sustain that pace next year and beyond.

The government should prioritize a strategy to foster balanced growth across the semiconductor industry and other manufacturing sectors. To boost and sustain growth, the government must develop multiple new growth engines that can drive the economy alongside the semiconductor industry.

The failure of the semiconductor boom to translate into gains in employment and domestic demand points to the limits of growth that must be overcome.

The government projected this year's job growth at 150,000, 10,000 fewer than the 160,000 forecast early in the year. It is the smallest increase in employment since 2020, when the number of employed people plunged due to the COVID-19 pandemic. Slower job growth reflects the semiconductor sector's limited ability to create jobs despite leading economic growth, as well as the severe downturn in employment in other industries.

It is also concerning that the youth employment rate is falling and that the number of people who have stopped looking for work, classified as “taking a break,” remains around 400,000. The rapid displacement of entry-level jobs performed by young workers as AI spreads is also heightening concerns over jobless growth.

The government must seriously consider ways to revive stagnant youth employment, which has been overshadowed by the impressive growth driven by semiconductor exports.

Ultimately, it is companies that pioneer new industries, drive technological innovation and create quality jobs.

Currently, many companies are taking a wait-and-see approach rather than making active investments, due to various factors including regulations that constrain business activities, a rigid labor market, overly pro-labor policies and mounting cost pressures. Under these circumstances, even the government's most ambitious growth strategies will struggle to revive private-sector vitality.

However, the government's plans for regulatory reform are vague, while its plans to increase fiscal spending are all too clear.

Buoyed by a surge in tax revenue from the semiconductor boom, the government plans to raise next year's total spending by more than 10 percent from this year, bringing it to a record-high level in the 800 trillion won ($536.7 billion) range.

Fiscal stimulus may produce a temporary effect, but it does not necessarily lead to sustainable business growth.

For growth to gain momentum, obstacles such as a rigid labor market, excessive regulations and burdensome licensing procedures must be removed. The problem facing South Korea is that it is passing a steady stream of pro-labor legislation while labor and regulatory reforms remain at a standstill.

Raising the economy's potential growth rate depends on an environment and institutions that enable the private sector to invest and innovate. The government's job is to reform institutions and pave the way for growth. It cannot achieve the vision simply by spending money. Regulatory reform must come first.