[Editorial] Growth Is at a Standstill, but Spending Keeps Rising — It Is Time to Resolve on Structural Reform

Two warning lights are flashing for the South Korean economy. Its potential growth rate is sliding toward the bottom, while fiscal spending continues to rise.
According to the latest data from the Organisation for Economic Co-operation and Development (OECD), South Korea's potential growth rate is expected to fall to 1.57% next year, after reaching 1.71% this year. In the fourth quarter of next year, it is projected to hit 1.52%, breaking another all-time low. The rate, which stood at 3.63% in 2012, has fallen every single year for 15 straight years. Potential growth refers to the fundamental strength of an economy, including labor, capital and technology. It should be seen as a sign that the underlying power of the South Korean economy has been exhausted. To make matters worse, spending pressures are mounting. The International Monetary Fund (IMF) projects that South Korea's pension spending will rise by 0.7 percentage points of gross domestic product (GDP) over the five years starting in 2025. That is the steepest increase among advanced Group of Twenty (G20) economies. Over the same period, pension spending is expected to rise by just 0.2% in Japan, 0.3% in Germany and 0.5% in the United States. South Korea alone is facing a dramatic surge in pension burdens.
Our economy's true shape is one in which the growth engine is cooling while welfare spending is exploding. One cannot help but worry that the country has fallen into the illusion that it has already become an advanced economy. It seems that attention is focused almost entirely on consuming the gains earned through the efforts of the state, companies and the public. There is also the sense that the country is clinging to a growth myth even as potential growth keeps declining. The recent strength in stock prices and export figures is largely the result of the semiconductor boom. For example, the 1.7% GDP growth recorded in the first quarter of this year was driven heavily by the semiconductor upswing. It should also be viewed as the result of a base effect created by last year's record-low growth rate. Experts are warning that if the semiconductor cycle turns down, growth could fall sharply in an instant.
Before it is too late, the structure of the economy must be fundamentally transformed. If the opportunity is missed, even the reins of reform will no longer be within reach. Korean society is already seeing demands from all sides to share the gains from past growth. At every election, short-term fixes and giveaway pledges drown out the agenda for structural reform. Groups determined to protect vested interests are also resisting reform fiercely.
There are many historical examples of advanced economies falling into the trap of low growth. South Korea is no different. Paradoxically, the moment we feel relieved while reaping the benefits of the semiconductor boom may be the last chance to carry out reform. We should also pay attention to the increasingly blunt warnings from central bank leaders. In his recent farewell remarks, former Bank of Korea Governor Rhee Chang-yong said, "I hope you will continue to study medium- to long-term tasks to solve the structural problems facing our economy, such as education, housing, balanced regional development, youth employment and elderly poverty." New BOK Governor Hyun-Song Shin also said in his inaugural address that the central bank must "play an active role in structural reform tasks for our economy." President Lee Jae-myung has already called for structural reform in six areas — regulation, finance, public institutions, pensions, education and labor — and stressed the need to raise potential growth.
If the government and the central bank are speaking with one voice about structural reform, what remains now is action. Growth will not rise through words alone. At this point, the country needs a decisive commitment to push reform forward, even at the cost of short-term pain. If South Korea fails to use the current period of prosperity, fueled by the semiconductor boom, as a springboard for reform, the reality it faces after the boom ends will be far harsher.