The Peninsula

President Yoon’s Economic Policies

Yoon Suk Yeol was inaugurated on May 9^th as Korea’s twentieth president. He takes office at a difficult with the global economy disrupted by the war in Ukraine and an increasingly threatening North Korea, which has launched 16 missile tests thus far this year. Meanwhile, inflation has accelerated to 4.8% (year-on-year), its fastest pace since 2008.

President Yoon campaigned on a platform of making a new Republic of Korea built on “fairness and common sense.” As a candidate, he made ten public pledges (Table 1). This note will consider the issues concerning five pledges that could have a significant economic impact.

Overcoming the impact of the COVID-19

President Yoon has promised “fair and complete” compensation of merchants and the self-employed for the losses that they suffered as a result of the pandemic. A presidential committee is to launched soon after the inauguration to oversee COVID-19 compensation. These measures are to continue for two years after the pandemic is officially declared to be over.

On May 12^th, the Cabinet endorsed a supplementary budget totaling KRW 59.4 trillion (2.9% of GDP) at its first meeting. More than a third of the budget, which will be largely financed by excess tax revenues, will be given to 3.7 million self-employed and microbusiness owners as compensation for their financial losses during the pandemic. In addition, payments will be made to those who experienced job insecurity during two years of social distancing.

Fiscal policy has played an important role in Korea’s strong rebound from a 0.9% decline in real GDP in 2020 to 4.0% in 2021. The supplementary budget will help sustain economic growth, which is projected to slow to 2.5% in 2022, according to the IMF. Discretionary fiscal support is estimated at about ¾ percent of GDP in 2020 and 2.5 % in 2021, contributing to a deterioration in the government’s budget balance from a surplus of 1.0% of GDP in 2019 to a deficit of 3.0% in 2021 (Figure 1, Panel A). Government debt, which in the past was kept below a threshold of 40% of GDP, has risen to 48%, but remains far below the OECD average (Figure 1, Panel B). In 2020, the government proposed a fiscal rule aimed at limiting the debt-to-GDP ratio to 60%, matching the fiscal rule in the European Union. The new administration intends to adopt that rule. Gradually reducing government deficits and limiting the growth of government debt is important in Korea, which faces the most rapid population aging among OECD countries.

Creating sustainable, good jobs

Korea’s employment rate in 2020 was the 11th-lowest among the 38 OECD countries, despite the high share of prime-age men in the labor force. Raising the employment rate is a priority to cope with a shrinking working-age population. President Yoon proposed two strategies to promote employment growth. First, he plans to create an organization dedicated to regulatory reform to boost business investment and ease labor regulations to give companies and workers more freedom. Regulatory reform could provide significant benefits. According to the OECD’s Product Market Regulation (PMR) index, which measures the degree to which government policies promote or inhibit competition in markets for goods and services, Korea’s regulations were the fourth most stringent among OECD countries in 2018 (Figure 2). Second, President Yoon aims to increase support for companies, in part through tax relief and R&D support, to help them grow. The government plans to focus on startups in the fields of health and cultural content.

Constructing 2.5 million new homes

Rising housing prices have been a key political issue in Korea in recent years. On a nationwide basis, housing prices have risen only 8% since 2015 compared to the 30% OECD average (Figure 3). However, housing prices in some parts of the Seoul metropolitan area have risen sharply despite numerous policy initiatives by former President Moon to stabilize them. In 2021, he pledged to build 836,000 new homes, but there is a long time lag between when construction is announced and when the homes are available for purchase.

 

President Yoon has promised to build 2.5 million homes by 2026, with around 1.5 million in the Seoul metropolitan area and 0.5 million in Seoul itself. Most of the new housing will be constructed by the private sector, with only one-fifth of the total being supplied by the state as public rental housing. The plan is similar in scale to that launched by President Roh Tae-woo, which built more than 2.7 million homes between 1988 and 1992.

Boosting the fertility rate

Korea’s fertility rate fell from 4.5 children per woman in 1970 to 0.8 in 2020 (Figure 4), the lowest among the 38 OECD countries. The decline reflects the challenges facing women that wish to combine careers with children, including a lack of work-life balance and childcare and the expectation that women will leave the labor force, at least temporarily, to care for children. Korea has taken a number of steps such as a subsidy for each child aged 0-2 to cover childcare in public or private centers and subsidies for childcare or kindergarten for children aged 3-5. President Yoon has pledged to introduce a KRW 1 million ($785) monthly subsidy for 12 months for new parents, among other types of support. Given the high costs of children, particularly for education, it is not clear if this amount will have a significant impact on the fertility rate.

Achieving carbon neutrality and building the strongest nuclear power country

Former President Moon announced a denuclearization roadmap in 2017, which proposed cancelling the scheduled construction of six nuclear reactors, prohibiting the extension of the service lives of 14 old reactors and forcing the early closure for safety reasons of a reactor. Under the Roadmap, the number of nuclear reactors would fall from 28 in 2022 to 18 in 2031 and then 14 in 2038. Consequently, the share of nuclear power generation would drop from more than a quarter in 2021 to around 6-7% in the 2050 Carbon Neutrality Scenarios (Table 2). Combined with the phasing out of coal, the downsizing of nuclear energy would require increasing renewables’ share of power generation to between 61-71%, which many experts believe is not feasible.

During the campaign, President Yoon’s pledged to expand nuclear energy and make Korea a leading power in this area. He argues that investment in nuclear energy is necessary to make carbon neutrality feasible. The plans to achieve Korea’s target of a 40% greenhouse gas emissions by 2030 and carbon neutrality by 2050 will be revised to target a larger role for nuclear power. Such an expansion should address the issue of safely disposing spent nuclear fuels. The government launched a process to build permanent storage facility for spent nuclear fuels from 24 reactors in 2016. It has identified nine candidate sites, but each has failed to win the support of the local community.

Conclusion

President Yoon’s campaign platform includes some significant policy changes that could bring significant economic benefits. However, his ability to enact his pledges may be hindered by the fact that the opposition Democratic Party holds 171 of the 300 seats in the National Assembly, while the new ruling party – the People Power Party — has only 109. The next National Assembly election is in 2024. In any case, the track record of Korean presidents in implementing their campaign promises is rather weak. According to the Citizens’ Coalition for Economic Justice, former president Roh Moo-hyun fulfilled 43% of his promises, compared to 41% for Park Geun-hye and 39% for Lee Myung-bak. The figure was only 18% for Kim Dae-jung, who had to enact policies to cope with the 1997 Asian Financial Crisis.

Randall S.  Jones is a Non-Resident Fellow at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from the Republic of Korea’s photostream on flickr Creative Commons.