Fitch warns of Korea's aging population

This is the sixth in a series of interviews with international experts on Korea to discuss pending issues surrounding the nation on the occasion of the beginning of 2018 ― ED.

Labor market reform urgent to raise productivity

By Kim Jae-kyoung

SINGAPORE ― Fitch Ratings has warned that South Korea’s growth potential will see significant erosion in the coming decade unless it copes with issues caused by the aging population and low productivity.

The global credit ratings agency is calling for Asia’s fourth-largest economy to double up efforts to push for reform in both the labor and corporate sectors to tackle such challenges.

“Fast population aging seems the most important drag on Korea’s potential growth in the decades ahead,” Thomas Rookmaaker, director of Sovereigns and Supranationals Group at Fitch Ratings, said in an interview.

He pointed out a number of Korea's peers in Asia face similar demographic pressures, but Korea's birthrate is the lowest among 40 countries tracked by the OECD. The population aged over 65 is also growing at the fastest pace.

According to the latest report by the Korea Institute for Health and Social Affairs, Korea’s working age population, those aged between 15 and 64, will drop by nearly 19 percent between 2017 and 2037, which is feared to reduce production and consumption thus hurting the country’s growth potential.

Rookmaaker said policy measures dealing with these structural issues, such as labor market reform, could support GDP growth in the years ahead.

“The government still has time for an effective policy response to population aging, for instance to deal with the upcoming fiscal pressures,” he said.

“To support GDP growth in the longer run, labor market reforms could for instance help improve productivity.”

He believes strong economic growth could be sustained by reforms that increase productivity, as well as improvements in governance standards.

“The extent to which the government’s supply-side reforms ― aimed to strengthen innovation and create a better level playing field between chaebol and small- and medium-sized enterprises (SMEs) ― will improve Korea's relatively low productivity,” he said.

He remains skeptical about the government’s attempts to create more jobs in the public sector because this is not a long-term solution to improving productivity.

“Some measures, such as an increase in government jobs and subsidies to SMEs, do not necessarily point to enhanced productivity,” he said.

In his view, reforms that increase transparency and generally encourage greater separation between the government and the corporate sector could structurally improve governance standards.

“The fact these issues were a key part of President Moon Jae-in's election platform and the broad public support for change bodes well for the chance of implementation of governance reform,” he said.

Rookmaaker expects Korea’s real GDP growth to remain strong at 3 percent in 2018 on the back of a strong fiscal stimulus by the government and a global industrial pickup.

“Demand is likely to be supported by the administration's focus on job creation and income-led growth though a raise in the minimum wage, the hiring of more civil servants and an expansion of the social safety net,” he said.

“So far, heightened geopolitical tensions on the Korean Peninsula have not held back spending, with consumer confidence sitting at elevated levels.”

But he forecasts GDP growth to gradually slow to 2.7 percent in 2019, although economic activity is likely to benefit from a fiscal stimulus.