The Peninsula

History and Demographics Present Policy Dilemmas

What Happened

• The National Assembly has approved three supplementary budgets worth nearly USD 50.5 billion combined, setting a record high of total USD 431 billion of annual expense.
• Despite these increases, Korea’s debt to GDP ratio of 43.5% remains below the OECD average (109.2%) and that of other peer economies like the United States (106.9%), France (122.5%), and Japan (224.1%).
• Nonetheless, government officials raised alarm over the fact that debt is growing faster in 2020 than during the Asian Financial Crisis of 1997-98.

Implications: Both the residual trauma from the 1997 financial crisis and the looming demographic change may affect South Korea’s future efforts to stimulate the economy. Some policymakers fear that the debt growth might erode investor confidence in the Korean market as it had during the 1990s. Even with emphasis from the International Monetary Fund that a growing government debt ratio is both desired and anticipated, there are additional fears that Korea’s currently robust fiscal capacity should be preserved for future spending on the country’s aging population. With these limitations, policy discussions in the near future on further stimulating the economy may become more contentious.

Context: When Western lenders began withdrawing money from Asia in the summer of 1997, South Korea’s debt-to-GDP grew 4.3%, which panicked investors and accelerated capital outflows. The subsequent crisis in South Korea left deep social scars: unemployment rate tripled and 80% of households experienced lower income. The current debt-to-GDP is growing at 5.5%, which has led to understandable alarm among domestic policymakers.

This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

Korea View was edited by Yong Kwon with the help of Sophie Joo, Sonia Kim, and Chris Lee. Picture from flickr user Mark Hanna