The South Korean government announced a projected economic growth rate of 3% for 2017/18 on Tuesday 25 July, up from its earlier outlook of 2.6% and a notably optimistic start for the new administration of President Moon Jae-in. With other international and domestic institutions, such as the OECD and Bank of Korea, predicting a 2.8% growth rate, the Moon administration’s optimism has seemingly placed great weight in the ‘complete paradigm shift’ that it has planned for the South Korean economy. Having inherited an economy with mounting socio-economic woes, it seems that Moon has decided to smile in the face of demographic adversity and positively embrace the highest projected growth rate for South Korea since 2014.
When Moon took office, he did so promising to put jobs and employment first, and many of the recently announced measures reflect a labour focused paradigm shift away from the chaebol reliant growth model of past administrations. By 2022, the South Korean minimum wage will increase roughly 30% from 2018 to reach 10,000 won ($11.60AUD) per hour. The government has also announced increased subsidies for babies, young job seekers, the unemployed and the elderly. To add further stimulus to an economy troubled with low consumer demand, companies and local governments will be given tax incentives and increased government funding on the proviso that they actively create more jobs.
At first glance, these recently announced measures look well positioned to simultaneously address domestic employment concerns and raise the growth outlook of the South Korean economy. However, it’s far too early to view the government’s new expansionary fiscal policy and job supporting measures with anything but the most cautious of optimism.
Moon will continue to face an uphill battle against a demography plagued with exceptionally low fertility, advanced life expectancy and a fast-shrinking workforce carrying an increasingly heavy economic burden. Although many of Moon’s measures aim to tackle these issues before they become catastrophic, his stimulus policies and plans to create jobs, largely through expanding the South Korean public service, will be limited by South Korea’s already rising government debt.
Moon’s presidential campaign was filled with promises that, alongside his recent announcements, will require significant increases to government social expenditure. These promises included raising the pension allowances to $300,000 won ($347.50AUD) to the bottom 70% income bracket of those aged 65 or older, and providing a monthly childcare allowance of 100,000 won ($115.80AUD) for every child aged under five. If Moon’s intention is to continue to address the demographic ills of his nation, he will undoubtedly be faced with choosing between one or more of three undesirable options: implementing sharp tax hikes to cover expenses, cutting back on other government projects, or allowing government debt to grow unchecked.
Although South Korea’s tax burden is low for an advanced nation, implementing tax hikes to cover increased social expenditure may come with the cost of jeopardising the government’s optimistic growth projections. The recent projected rise in South Korea’s growth can largely be attributed to the nation’s recent export recovery, led by a strong demand for tech such as computer memory chips, rather than resulting from increased domestic consumption or stimulus. This reliance on export growth highlights the reality that South Korea’s overall economic growth is still very much chaebol-centric. Even in the wake of former President Park’s political scandals, including being charged with bribery received from the family-run conglomerates, Moon’s promised restrictions on the extreme power of the chaebol will be difficult to implement while maintaining his administration’s optimistic 3% growth projection.
For the time being at least, Moon appears to have taken his first actions to secure his promised paradigm shift and begin remedying the many woes of the South Korean economy. However, whether Moon continues to stay true to this new direction for the South Korean economy as the opposing forces of debt, demography and development close in on him remains to be seen. Caught in a sea of economic woes, South Korea must now wait patiently until Moon has his chance to turn the tides.
Dylan Hubbard is the International Trade and Economy Fellow at Young Australians in International Affairs.