Our Chief Korea and Taiwan Economist discusses the reforms needed
to overcome Korea’s urgent demographic crisis.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Kathleen Oh, Morgan
Stanley’s Chief Korea and Taiwan Economist. Today I’ll discuss
what’s needed to overcome Korea’s aging population crisis.
It’s Tuesday, Oct 15th, at 4 PM in Hong Kong.
South Korea faces some of the world's most challenging
demographics and will officially become a super-aged society next
year – that’s more than 20 percent of the population 65 or older.
The implications of this are so significant that the Korean
government recently declared a national emergency, and we don’t
think this is overstating the case.
Korea’s low fertility rate is the primary culprit. In 2023 it
plummeted to the lowest level globally and currently sits at
0.72. For reference, the total fertility rate of 2.1 children per
woman is what’s necessary to maintain a stable population in
general. By next year, Korea’s population will start declining
and is projected to shrink by a third over the next 40 years as
the working population halves. At this pace, the Bank of Korea
forecasts that Korea’s potential growth could enter negative
territory by 2040, down from 2 per cent in [20]24-25.
So why does Korea have such a record-low fertility rate? In the
short term, there are two key drivers: First, the declining
number of marriages during the pandemic drove a rapid drop in
births; having children out of wedlock is taboo in Korea. Once
weddings resumed in 2022, Korea saw a slight but insufficient
rebound in births.
Second, housing prices have gone up 80 per cent in the past
decade, which has discouraged young couples from having families.
Families with first children feeling extra financial burdens to
have [a] second child. Beyond the short term, structural factors
have also played a role. After a compressed period of rapid
economic growth, Koreans feel uncertain about the employment
conditions and housing outlook.
Tackling the low fertility rate has been on Korean policymakers’
agenda for the past 20 years. The government has invested more
than $320 billion into solving the demographic challenge. And
while these efforts have certainly raised awareness, they have
yet to overcome the crisis. And why? Because Korea has not
addressed the root causes of the problem -- income uncertainty,
high childcare and education costs.
It’s clear what’s needed here are structural reforms and Korea is
clearly taking important steps towards overcoming the issue by
tackling the fundamental problems now. Policymakers are working
to reshape the pension system for the first time in 15 years.
They are focusing on measures around improving work-life balance,
reducing the gender wage gap, and increasing support for working
parents. They are also considering lowering barriers to
immigration, which could help alleviate talent shortages. They
are also working on reducing the cost of private education. And
finally, the government is also focused on improving the
country’s capital market infrastructure. They are aiming to
attract foreign investment, as well as to help households secure
[a] source of asset accumulation, and lower borrowing costs for
domestic players.
Of course, it’s impossible to quickly reverse the downtrend and
positive change will require multiple years - even decades.
Korea’s government has set a medium-term goal of returning the
fertility rate to 1.0 by 2030, which would delay working
population decline by five years. And if the fertility rate
reaches 2.1, that would delay the decline in the workforce by 20
years. Conversely, if Korea’s fertility rate remains at the
current rate of 0.72, the population will halve by 2065 and the
economy will start contracting in 2040, a worst-case scenario
that the government is determined to avoid.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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