Korea needs bold fiscal stimulus
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🕐 2025-02-25 00:38:17
SONG Kyung-jin
is Country Representative Korea of The Asia Foundation. Song led the Institute for Global Economics and served as special adviser to the Presidential Committee for the Seoul G20 Summit in the Office of the President.
The Dec. 3 declaration of martial law has plunged Korea into a political and economic crisis, which is deepening in an unexpected way following the violent attack on the Seoul Western District Court. Even under military dictatorship, there was never such an attack on a courthouse. The violence shocked the country and the world. There are serious worries that illegality and violence will increase until the Constitutional Court makes its ruling. Perpetrators of such acts of violence against the rule of law must be punished without pardon in order to defend democracy.
With instability continuing and uncertainties rising, a sense of gloom pervades, casting a shadow over the Korean economy and people’s livelihoods.
Last Friday, the International Monetary Fund released its World Economic Outlook update where it upped its forecast for the world economy to 3.3 percent from 3.2 percent in October 2024. Meanwhile, it downgraded the growth forecast for Korea by 0.2 percentage point to 2 percent from the previous forecast of 2.2 percent. It is even slightly higher than those of other forecast institutions, including the Bank of Korea’s 1.9 percent. The average growth rate forecast for the Korean economy in 2025 by major investment banks dropped from 2.1 percent last November to 1.8 percent this month. JP Morgan forecast a meager 1.3 percent, the lowest growth rate among major investment banks.
These forecasts, made prior to the Jan. 19 violence at the courthouse, now paint an even more concerning picture. The public’s economic distress index is currently at an all-time high.
Domestic demand remains weak and is getting weaker. Exports are moderating and the export increase is thinning. Export growth is expected to slow down due to intensifying competition in key industries such as semiconductors and downward factors resulting from changes in U.S. trade policy. According to the Federation of Korean Industries, its business sentiment index survey showed the longest consecutive fall for 34 months since April 2022 and the forecast for January is 84.6, falling from 12.7 points in December 2024. Consumer sentiment also dropped in December from 88.4, down 12.3 points from 100.7 in November. The economic sentiment index was down 9.6 points from November to 83.1 points in December.
The Korean won to U.S. dollar exchange rate was 1,472.5 won per dollar at the end of December, its lowest level in 15 years. The won was the worst performer in Asia against the dollar in 2024. Such a large depreciation of the won raises import prices and increases inflation and the cost of living. Inflation is upping again. It also makes the import of raw materials and energy more expensive, thus affecting export competitiveness. The Korean stock market was the poorest-performing market among major economies last year. Foreign ownership in the Korean stock market is 32.2 percent. If the political uncertainty and instability continue, foreign investors’ confidence in the Korean market will also be hurt.
The current economic difficulties call for extraordinary economic measures. Frontloading the budget is far from sufficient. The Korean government should deploy bold fiscal measures to boost the economy. Small, meager measures will create little effect, prolonging the economic downturn. Some argue for fiscal prudence and against it on the back of increasing the national debt to gross domestic product (GDP) ratio. It is true that debt to GDP increased rapidly during the COVID-19 pandemic.
However, current urgency precedes such a debate and justifies a bold fiscal stimulus. Besides, Korea’s national debt to GDP stands at 47.4 percent as of 2024, which is much lower than other major economies. It has space for fiscal stimulus. The job of the government and economic policymakers is to provide a lifeline for the ailing economy and revitalize it to the benefit of the people and the country.
The stimulus package should be bold enough to serve as a catalyst for economic recovery. The package should be as large as or larger than the fiscal stimulus employed in 2009 during the global financial crisis, which was around 3 percent of the GDP.
Part of the stimulus package should be injected into restoring investment in R&D and innovation, which was drastically reduced due to policy misjudgment. Investment and policy support for R&D and innovation are precisely what Korea used to fuel its growth miracle in the 1970s and 1980s and to overcome the Asian economic crisis in the late 1990s. Investment in critical technologies must be accompanied to boost competitiveness.
Policy support, such as reducing the interest burden or offering low interest rates for small business owners and the self-employed who are especially affected by economic difficulties, should be implemented as soon as possible. The high percentage of self-employed individuals in Korea should be considered when formulating fiscal stimulus policies.
This is the crisis we should not miss. It offers an opportunity to reform and upgrade the institutions and the economy. The Korean economy became stronger after it successfully dealt with the Asian financial crisis in 1997-98 and the global financial crisis of 2008-09. This is a painful but useful time to push for creative destruction.
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