SEOUL – The International Monetary Fund (IMF) has issued a stark warning that South Korea could face a sustained period of low economic growth unless it undertakes significant structural reforms. The IMF’s cautionary stance highlights several critical challenges, including the repercussions of COVID-19, demographic shifts, and high inflation rates, which threaten the nation’s economic stability.
South Korea is grappling with one of the world’s lowest fertility rates at 0.78 and an old-age dependency ratio projected to reach 80%. These demographic challenges are compounded by an elderly poverty rate within OECD nations that stands at a substantial 40.4%. To address these issues, the IMF underscores the necessity for labor market adjustments to improve economic prospects.
The nation’s pension system is also under scrutiny, with predictions indicating that public debt could surge to twice the national GDP by 2075 without reform. In response, the IMF suggests increasing mandatory national pension contributions, which currently sit at nine percent, significantly below the OECD average of eighteen percent. Aligning with international standards is deemed crucial for the fiscal sustainability of Asia’s fourth-largest economy.
Economic policy decisions in South Korea are further complicated by consumer price inflation rates peaking at around 6.3%. This inflationary pressure has stifled government efforts to stimulate growth through economic stimulus measures initially planned for later this year. Instead, the IMF recommends pursuing structural changes over liquidity injections as a means to foster economic expansion while keeping inflation rates in check.
Sung Tae-yoon from Yonsei University supports this strategy, which aims to avoid exacerbating already high inflation ahead of upcoming general elections. Among the proposed reforms are measures to address labor market inflexibility and the gender employment gap, which could enhance labor productivity and elevate Korea’s projected economic growth. The country’s current sluggish pace of around 1.4% this year is anticipated to reach an average of up to 2.3% through 2028 if these reforms are enacted.
With these warnings and suggestions in mind, South Korea faces a crucial juncture where timely and effective policy decisions could determine its economic trajectory for decades to come.
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Source: Investing.com
