IMF director warns against Korea following Japan's example

By Choi Sung-jin

“Korea, like Japan, could be exposed to ‘secular stagnation’ in a few years because of demographic and other problems.”

Rhee Chang-yong, director of the IMF’s Asia and Pacific Department, made the remark at an international symposium in Seoul Tuesday, delivering a lecture on major economic tasks for Asian countries in 2016.

For the Korean economy to get over its crisis, it is essential to shift from manufacturing to the services sector and reform the dual-structured labor market and other areas, he said. Particularly important are structural changes to the Korean economy through “political decisions,” Rhee said.

The IMF official cited demographic structure -- such as the low birthrate and an aging population -- as the biggest problem facing the Korean economy and society.

“The biggest internal factor causing concerns about ‘secular stagnation’ (protracted structural slump) is demographic structure,” said the No. 3 official at the International Monetary Fund. “More specifically, the fall of absolute population and rapid change in demographic structure are the main problems.”

Citing the example of Japan, which is experiencing a population loss equivalent to the U.S. city of Baltimore (about 720,000) each year, Rhee said the drop of absolute population means the reduction of economically active people, and an increase in the aged population leads to the growth of elderly poverty.

The IMF economist stressed that Korea’s current economic growth rate of about 3 percent is far from bad by international standards, and particularly those of industrial countries. “We should not cling to the previous framework anymore,” Rhee said.

Noting that Korea’s manufacturing industry has been developed sufficiently, Rhee said the nation should find opportunities in service sectors, including health care. Manufacturing accounted for 27.8 percent of total employment in 1989, but the comparable share fell to 16.8 percent in 2008, he said.

As the growth of global trade has continued to hover below the economic growth rate, exports cannot solve the problems of employment and economic inequality, Rhee said.

He suggested the business services sector based on manufacturing as a cure to this problem. “For example, Korea’s medical services have reached the world’s top levels but the industry is targeting only the domestic market,” he said. “It is not difficult for Korea’s developed manufacturing sector to shift to the services sector. What the nation needs is political determination.”

Aside from a long-term structural slump, Rhee cited declining regional trade, expanded volatility in capital flows and widening income inequality as the economic challenges facing Asian nations.