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Aging populations will pose economic challenges for all G20 counties in the coming decades, but South Korea’s predicament stands out as one of the most daunting. As its population of elderly citizens grows and its labor force shrinks, the dynamic economy is poised to face serious headwinds. To mitigate the effects of this looming crisis, South Korea’s best bet is to make substantial investments in the emerging technologies of the Fourth Industrial Revolution.

Early Signs of Aging in South Korea

South Korea’s demographic decline has already begun to impact the country’s economy, and this trend will only get worse. The number of people ages sixty-five years or older per 100 people of working age is used to indicate the economic burden a country’s workforce faces in supporting an aging population. For South Korea, this figure is now 21.5, below the current average (28) among members of the OECD. Due to the country’s declining birth rate, however, South Korea’s figure is expected to skyrocket to 88.7 by 2060, well above the projected OECD average of 55.6 (see figure 1). Even Japan, Italy, and Germany (the OECD countries with the most-aged populations now) will see this metric rise less drastically—to 79.9, 66.7, and 59.6, respectively. This trend is poised to be a major drag on economic output as South Korea’s labor force is slowly depleted and as public spending to provide for seniors is increased.

Slow population growth has been a key contributor to South Korea’s shrinking potential growth rate as the country’s labor pool stagnates. To compound matters further, the country’s low economywide productivity (ranked thirty-first of thirty-six as of 2018) and its low labor productivity (ranked thirty-second of thirty-six as of 2019) both are near the bottom among OECD countries.1 A smaller, less productive workforce would give South Korea a lower ceiling for future growth (see figure 2).

In addition, welfare expenditures will need to dramatically rise as South Korea’s population gets older. In 2019, public social spending in the country accounted for about 12.2 percent of GDP, well below the OECD average of 20 percent. Under the government’s plans prior to the pandemic, this figure was expected to grow to 25.8 percent by 2060. With new social welfare spending to bolster the economy during the pandemic, this figure could conceivably be revised upward. To be certain, South Korea has an urgent poverty crisis among its elderly population, and senior citizens sorely need more resources. But the country’s diminished long-run growth prospects mean that the South Korean government will presumably have less revenue to fund these new spending needs unless the country’s tax system is overhauled.

Saving up for this looming fiscal burden precipitated by South Korea’s demographic decline has placed downward pressure on the country’s public spending of late. South Korean authorities have been reluctant to increase public expenditures, as encouraged by International Monetary Fund staff in recent years, citing concerns over an aging population alongside the potential costs of someday reunifying North and South Korea as a single country. This apprehension also materialized last fall amid new rounds of stimulus spending to combat the effects of the coronavirus pandemic, with the Ministry of Economy and Finance’s plan requiring the government to cap the country’s debt-to-GDP ratio at 60 percent and the annual fiscal budgetary balance at -3 percent through 2025.

Kyle Ferrier
Kyle Ferrier is a fellow and director of academic affairs at the Korea Economic Institute of America.

While this was seen as a prudent measure, South Korean public debt is still relatively low, and the projected costs of the economy’s recent reliance on government spending to drive growth is unlikely to strain the country’s balance sheet.

Hopes of a Technological Silver Bullet

Over the long term, what is South Korea to do to keep its economy humming along amid this demographic decline? Targeted spending may be one of the best ways forward. Short of a reversal of current demographic trends, the closest thing to a silver bullet for South Korea’s demographic shortfall is heavily investing in emerging technologies such as 5G and artificial intelligence (AI).

As these technologies mature and proliferate, they will open doors for new industries and allow for tremendous productivity gains, creating massive new opportunities for growth that will shape the future of the world. An influential 2018 white paper released by the consulting firm McKinsey and Company and the World Economic Forum estimated that such technologies could add up to $3.7 trillion to the global economy by 2025. The consulting firm PwC, meanwhile, claimed that 5G could add upward of $1.3 trillion to the global economy, while AI could tack on $15.7 trillion in growth by 2030.

No other industries are expected to grow as rapidly and be as transformative in the near future. The next closest sector that may have a significant impact is renewable energy, but estimates of its contributions to global growth in the coming decade are not as large. According to a study from the International Renewable Energy Agency (IRENA), if renewable energy were to jump from about 29 percent in 2020 to 36 percent of the global energy mix by 2030, it could increase global GDP by up to $1.3 trillion.

Renewable energy shows great promise for the global economy beyond 2030 as well, though some projections rely on sweeping shifts in existing trends that may prove too optimistic to be fully realized. IRENA, for example, projected in 2020 that the right investments now could add a cumulative $98 trillion to global GDP by 2050, but this would require, among other factors, that renewables reach 86 percent of the global energy mix. However, IRENA has calculated that the world’s current trajectory will only bring renewables to 55 percent of total energy production by 2050, below the 57 percent the organization states would be needed by 2030 to realize this scenario (much less the even loftier 86 percent goal for 2050). Even as high future economic returns on Fourth Industrial Revolution technologies appear more assured, renewable energy should continue to be a pillar for South Korean public-led spending.

Beyond the potential growth prospects, capitalizing on these technologies could also add value to South Korea’s unique situation by providing more cost-effective healthcare for seniors and possibly allowing for high sustainable growth with a leaner, more flexible workforce. The fields of AI, big data, and robotics are already working in tandem to improve data sharing, diagnostics, and treatment—a trend that will likely continue to improve and may help lessen the burden on future public welfare spending. Additionally, it is still not clear whether the number of new jobs from the broad adoption of emerging technologies in the Fourth Industrial Revolution will exceed the number of jobs eliminated in older industries, as occurred in each previous industrial revolution. This state of play will create its own challenges for governments, such as widening inequality, but overall it may help to alleviate the longer-term impact of population decline on the economy as technologies such as robotics and AI can help industries become less labor-intensive without sacrificing output. As one study published by the World Economic Forum posited, “The wave of technologies that inspires fear in many countries could help remedy the social and economic challenges posed by population aging in others.”

South Korea is already a global front-runner in digital technologies, and capitalizing on this lead, especially abroad, could significantly bolster the country’s future economic competitiveness. After all, in recent years, South Korea has ranked among the top five countries for patents in the fast-growing market for information and communication technology (ICT) devices. The country also has the world’s first commercial 5G network, one of the most comprehensive networks unveiled so far. And 5G is also the foundation for effectively utilizing the Internet of Things, which will power technological innovations such as autonomous vehicles, smart cities, and smart factories. South Korean President Moon Jae-in has prioritized high-tech development even further as part of his pandemic recovery plan through the Digital New Deal, which aims to directly spend 44.8 trillion won (about $40 billion) and create 900,000 jobs in tech by 2025 (see table 1).

While AI also will be critical to the economies of the future, South Korea trails the United States, China, and several other advanced countries on this front. The Digital New Deal can help shore up areas where the country is lagging behind. New funding will support the government’s 2019 National Strategy for Artificial Intelligence, which aims to make South Korea a leading country in digital competitiveness by 2030. In 2021 alone, the Moon administration expects 9.9 trillion won (about $9 billion) in government and private funds to be spent on developing AI and other data-driven technologies.

Taking a High-Tech Gamble

The success of this strategy will depend on more than big investments. A key contributing factor to South Korea’s low productivity is that the productivity gains from adopting digital technologies are concentrated in large ICT manufacturers, which constitute only a small share of total employment. Service businesses in other sectors represent a far greater share of employment, but they are far less productive. This gap is present across OECD countries, though it is more pronounced in South Korea and can be closed at least partially if small and medium-sized enterprises begin taking better advantage of these technologies. Seoul must also engage with a variety of global stakeholders in an increasingly strained geopolitical environment to ensure market access, fair competition, and intellectual property protections for its emerging technologies.

In the end, major spending on innovative technologies like 5G and AI is a bet in the face of a looming demographic crisis—a prudent one, but a bet nonetheless. If the payoff is minimal, South Korea’s future economic woes will get worse as the country’s debt situation becomes more precarious amid persistently low growth. However, if investments provide the expected returns—and there are promising signs that they already may be delivering, given how AI is strengthening the country’s pandemic response in areas such as healthcare and biomedicine—it would be a huge boon to the future South Korean economy and strengthen the country’s competitiveness, despite the coming challenges of population decline.

Notes

1 These rankings were compiled in 2018 and 2019 before Colombia became the thirty-seventh member of the OECD in April 2020 and before Costa Rica became the thirty-eighth member in May 2021.