Overcoming S. Korea’s growth potential shock depends on political leadership

“You are a true patriot.”

I heard this over and over again after I gave birth to my third child two years ago. While it was meant to be a compliment, I felt perplexed. I find it odd that the natural course of life of an individual can be described as a patriotic activity, which should be used for the independence movement during the Japanese colonial era or a pro-democracy movement during the military dictatorship. Is giving birth and raising children solemn and difficult enough to be compared to patriotism for South Koreans in the 2020s?

Raising three children, however, is making me realize the weight of my friends’ comments on my last birth. Combined with high inflation and high interest rates, private education expenses for my first child in high school and second child in elementary school account for over 30 percent of my salary. For my first child, I am only spending the average amount of private education expenses for a student attending a regular high school in the Gangbuk region in Seoul. Private tutors are beyond our means. I was shocked to hear that a friend of mine spends about five million won per month on private education for her child attending an autonomous private high school during school vacations. I was reminded of an acquaintance who was considering working in a remote overseas region to pay for his child’s education a few years ago. People used to work across the seas to earn oil money in the Middle East and now they work overseas to pay for their children’s education.

The OECD predicted recently that South Korea’s growth potential for this year would be below two percent for the first time and it would further drop to 1.7 percent next year. It is lower than the next year’s predicted growth potential of 1.9 percent for the U.S., which has a 15 times larger economy than South Korea’s and a much longer history of capitalism. The current situation in South Korea can be truly dubbed as a ‘growth potential shock.’

Low fertility rate, aging population, and decreasing productivity are the causes. These are now separate issues but interconnected. Without fruitful efforts to improve productivity through education and labor reforms, the solidified structure of a low birth rate cannot be addressed. For example, productivity and economic growth rates cannot be increased without an education reform to lower immense private education expenses and nurture talents suitable for the shifting industrial structure into the era of artificial intelligence. While some propose attracting more immigrants as a solution, the concerns over side effects, such as riots by immigrants in France, cannot be overlooked.

In the end, structural reforms to improve productivity and break the structure of low fertility are the clear solution. What’s problematic is that reforms come with a price as a Korean saying says good medicines taste bitter. One example is resistance of the vested rights who benefit from the existing social structure. There is no solution other than the standard tactics of the political circle consistently convincing interest groups based on the public’s shared understanding of reforms.

“We all know how to resolve the low growth issue. What’s stopping us is that each agenda has different stakeholders,” Governor of the Bank of Korea Rhee Chang-yong recently said in a press conference. “The growth potential will exceed two percent with a successful structural reform. Choices are in the hands of politicians.” However, the government is under criticism as it couldn’t even specify insurance premium rates in its proposal for pension reform, which is being pursued as one of the three major reforms. If the pension reform, which holds much significance with lasting impact, is being carried out with the intention of earning votes in the next year’s general elections, the government won’t be able to avoid criticism for populism, just like the previous administration. Political leadership to firmly pursue built-up structural reforms – remote medical service, increasing quota for medical schools, and the national pension – without being sidetracked is desperately needed.