I. The Importance of Planning for the Future
The global economy is entering a new era that must grapple with changing structural and long-term factors, such as low growth, an aging population, climate change, and energy supply and demand uncertainty. Long-term growth is uncertain due to limitations in the quantitative investment growth model and exposure to social conflicts that arise from these trends. In order to face these challenges, the government has prepared a fundamental and long-term strategy for the next 30 years.
According to ‘selection and concentration’ principles, middle to long-term policies were suggested rather than offering concrete policies and discussing their implementation. The government proposed following a policy of inclusive growth that can boost both growth potential and social integration at the same time. The government supplied a set of core guidelines to each ministry.
II. Core Factors that will Influence Korea’s Future
1. Potential Growth
The Korea Development Institute (KDI) predicts that Korea’s potential growth rate will fall from an average of 3.8% from 2011-2020, to 2.9% from 2021-2030, and finally to 1.9% in 2031-2040 due to the low birth rate and the aging of the population. The accumulation of capital will decline due to a slowdown in investment, and in the case that Korea cannot improve productivity, there is a possibility that this decline in potential growth will become permanent. However, new growth momentum can be expected from the unification of the Korean peninsula (an estimated increase of 0.86-1.34 percentage points in the potential growth rate) by utilizing North Korea’s human capital, investing in SOC projects, and increasing the efficiency of production.
2. Demographics
After unification and in the case that North Korea’s current birthrate is maintained, the percentage of the economically active population will increase from 52.7% to 57.1% and the elderly population will decrease from 37.4% to 30.2%. The elderly poverty rate is high and retirement planning is low, therefore the demand for entitlements, such as healthcare and retirement pensions is forecast to greatly increase.* The demand for risk-free assets will increase due to the aging population, therefore the decline in the economy is forecast to accelerate as investment shrinks. In the middle to long-term, if optimal welfare systems are not implemented, there are concerns of a vicious cycle forming where fiscal soundness is threatened and economic growth falls.
*the poverty rate for the 65+ population (2011): Korea 45.1%, America 22.4% and the OECD average 13.5%
3. Climate Change and Energy
Temperatures are rising faster than initial forecasts, and as extreme weather conditions are growing larger and becoming more regular, disasters are forecast to increase and the supply and demand for food is projected to worsen. The supply and demand conditions for energy are expected to worsen, which is a threat to Korean economic growth stability. Energy consumption is quickly increasing and supply conditions have become more difficult, leading to the possibility of energy supply and demand uncertainty. The energy paradigm must be shifted to emphasize supply management and preemptively responding to supply uncertainties while strengthening the response capability of domestic industries. The government plans to take advantage of the global smartgrid and the bio-energy market, as well as nurture low energy-consuming high value-added businesses.
4. The Economic / Social Gap
Due to gaps in each sector becoming more permanent, conflict and opposition have entered the national discourse while national development has become a controversial issue. Class mobility is slowing down due to social and economic gaps. The welfare burden on young people is increasing due to the aging of the population and job competition. Many people fall through the cracks in the social safety net and support for pensioners is at a low level. Minorities and other vulnerable social groups, such as the disabled, women and impoverished children receive both insufficient inclusive care and insufficient opportunities.
5. Unification
Korean unification will increase both the economically active population and capital investment, improve productivity, and invigorate foreign economic cooperation, all of which will contribute to increasing the potential growth of the Korean economy. Corporation facilities investment and infrastructure investment, including transportation and communication, is expected to increase. There will be long-term synergy effects, such as a reduction in costs arising from separation (national defense, diplomacy, etc) and a boost to economic cooperation. Energy development projects are expected to become more efficient as underground resources in North Korea are developed, and the North and South are connected through gas pipelines and power grids. The diffusion of risk on the Korean peninsula will enhance economic cooperation and accelerate joint cooperation with regional neighbors, such as China and Japan. There are fiscal burdens associated with unification, such spending on social security, expanding social overhead capital facilities, and improving institutions. In the case that Korea reunifies by 2020, the cost of reunification will amount to 1%-7% of GDP annually for 10 years. Even though tax revenues will increase due to economic growth, the fiscal burden of unification will be considerable and it is possible for sovereign debt to increase.
III. Middle and Long Terms Policies
These policies are directed towards promoting high-tech and high-quality human resources, inclusive development and a sustainable future.
1. Promoting High Tech and High Quality Human Resources
The education system will be changed to produce more creative, innovation-directed human resources and to provide life-long education, which will help aging workers acquire up-to-date skills. To this end, the government will increase support for graduate schools and encourage colleges to offer job-related, life-long education. The government will also increase its investment in public education, which will reduce the number of students per teacher, while strengthening the high quality human resources-raising system by encouraging double diplomas and multiple majors. Students studying in high-tech fields will have their support increased to levels offered in advanced countries.
Corporate R&D investment will receive different kinds of support depending on its purpose: Large corporations will get incentives when they invest in R&D to develop their own technologies, and SMEs (small- and medium-sized enterprises) will be supported when they invest in improving their capabilities. To help develop core technologies, the government will revise the budget system and provide long-term support, while revising the evaluation system to allow for sincere mistakes. The government will increase socially responsive R&D investment to the OECD average. In addition, the government will introduce measures to encourage private investment in SMEs and service industries.
The government will increase support for future growth engines, which are highly risky and require long-term investment. With Korea’s industrial landscape expected to change, for example, the moving of manufacturing facilities to China, future growth engines will be adjusted on a regular basis and new future growth engines will be continuously sought. Korea’s strong manufacturing related service industries, such as maintenance and installation, S/W, design, legal and accounting and other knowledge-based services will be consistently nurtured, while unproductive areas such as whole and retail sales will be restructured. The IT sector will be converged with the service sector to help increase productivity and added value. The government will promote high-added value service exports, particularly medical service and contents exports, while boosting international finance and seeking the won’s increased global use.
Please refer to the attached PDF for more details.
Government press release (December 27)