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South Korea faces existential issue: OECD

July 11, 2024 - 18:58 By Choi Ji-won
Citizens are seen walking on the streets in Gwanghwamun, central Seoul, on June 19. (Yonhap)

The South Korean economy is poised to continue its recovery in the latter half of this year, yet the country must address its "existential issue," which stems from problems such as low productivity, a declining population and climate change, the Organization for Economic Cooperation and Development said Thursday.

"We publish surveys every two years, but this one is about an existential issue for Korea," said Vincent Koen, the OECD's country studies division chief in the economics department, during a press briefing at the Ministry of Economy and Finance building in the city of Sejong.

One urgent issue Korea must address is the population decline and its notoriously low fertility rate, according to the "OECD Economic Surveys Korea 2024" report released that day.

"Supporting people to have the number of children they desire would dampen the projected population decline, while lengthening working lives and welcoming more foreign workers would counteract the adverse effects of aging," the report noted.

For this, Koen also called for structural reforms in the labor market, improvements in labor and family policies, and changes in societal norms to counter population decline.

The report also called for a "decisive upgrade" in Korea's export-oriented growth model to bolster declining productivity.

Citing the gap between large and small companies as a key reason for falling productivity, the OECD urged reforms to create a level playing field for competition. Stricter management of subsidies and benefits for small and midsized companies as well as streamlined regulations to enhance market competition are recommended, the report said.

With Korea aiming to cut greenhouse gas emissions by 40 percent by 2030 and achieve carbon neutrality by 2050, the OECD advised advancing the emissions trading scheme and implementing more energy-saving measures.

Vincent Koen (left), the head of country studies division of the OECD Economics Department, and Jon Pareliussen, a senior economist at OECD heading the Korea desk, hold a press briefing at the government complex building in Sejong on Thursday. (Ministry of Economy and Finance)

Meanwhile, the OECD survey report forecast a 2.6 percent growth outlook for the South Korean economy this year, driven by improved exports and strengthening domestic demand in the second half.

"With inflation falling back and renewed demand for computer chips powering a wave of investment in AI across the world, exports are again driving growth," Koen said, adding that Samsung Electronics' recent earnings surprise in the second quarter — a 15-fold surge on-year to exceed 10 trillion won ($7.3 billion) — supports this trend.

For 2025, the OECD expected that Korea's economic growth would slow to 2.2 percent.

Koen pointed out a potential risk behind such a trade-dependent model, with tensions between Korea's main trading partners, the US and China, being felt, albeit limited, while high supply chain dependencies on individual countries for some critical inputs being key risks to hedge.

Unlike exports, private consumption in Korea has been weak in the first half of the year, pulled down by high interest rates and weak real wage growth. The OECD anticipates the domestic market to rebound in the latter half.

"Elevated debt servicing burdens and accumulated inflation will continue to weigh on private consumption and investment in the short term, but domestic demand should strengthen from the second half of 2024," the report stated.

The OECD estimated Korea's inflation at 2.5 percent, down 0.1 percentage point from its previous outlook. With inflation continuing a stable downtrend this year, the organization projected Korea to reach the 2 percent target later this year.