Economically, S. Korea is reminiscent of Japan, but different in important ways

Posted on : 2016-09-17 07:55 KST Modified on : 2019-10-19 20:29 KST
IMF report highlights how South Korean economy differs in terms of fiscal soundness and higher inflation
A 2016 Article IV report for South Korea published on Sept. 8 by the IMF
A 2016 Article IV report for South Korea published on Sept. 8 by the IMF

From a low birth rate and an aging society to a decline in the potential growth rate - the issues facing the South Korean economy as it loses steam are becoming startlingly reminiscent of the precursors to Japan's two-decade-long recession. Is the economy being drawn into an endless tunnel? The International Monetary Fund (IMF) says no. According to its diagnosis, the South Korean situation may seem to have parallels with Japan's, but differs in a few important respects.

A 2016 Article IV report for South Korea published on Sept. 8 by the IMF analyzed South Korea's low birth rate, aging society, and economic growth rate decline in a separate report titled "Korea's Challenges - Parallels with Japan." To begin with, the organization noted distinct similarities between the signs of crisis facing the South Korean economy and those seen in Japan in the early and mid-1990s.

According to the IMF, South Korea's population structure is following the lead of Japan by a difference of two decades. In Japan's case, the productive population forming the backbone of economic activity hit a peak of 63% of the general population in 1995 before declining to 56% in 2015. South Korea's productive population is also expected to peak at 66.5% in 2017 before declining to reach 56% within 20 years.

South Korea's labor productivity was also found to be high even by global standards, rising an average of 4.6% per year between 2001 - but with services achieving just half of that. It's a similar situation to the one in Japan, where manufacturing labor productivity has nearly tripled since the 1970s while service industry labor productivity has risen by just 25%. Another similarity is the dual labor market structure that has arisen as barriers between regular and irregular work have grown.

But the IMF also identified differences between the two economic systems. To begin with, it praised South Korea's fiscal soundness. While Japan's national debt ratio soared from 70% of gross domestic product (GDP) in 1990 to 250% in 2015, South Korea's level remained at 40% as of 2015. It's a signal that the South Korean government has the financial wherewithal to spearhead restructuring efforts and can respond easily to short-term side effects.

The IMF also noted qualitative differences in the low prices faced by South Korea and Japan. South Korea's inflation rate hovered over 4% through 2011, but has remained in the 1-1.5% range since 2012. It's similar to the situation in the early 1990s for Japan, which experienced long-term deflation. But the basic inflation rate for South Korea when short-term variables such as low oil prices are factored out remains just over 2%. The situation is different from the one in Japan, where the basic inflation rate was lower.

As a response, the IMF advised intensive structural reforms by the South Korean government, including restructuring of so-called "zombie companies." It also predicted reforms to the dual-structure labor market could play a key role in catalyzing economic growth. With demographic structure changes having the largest impact on the economic system, it recommended that fiscal and monetary authorities institute measures quickly to deal with the low birth rate.

By Noh Hyun-woong, staff reporter

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