The Organization for Economic Cooperation and Development has sharply raised its forecast for South Korea’s economic growth this year to what would be the fastest pace in five years, citing an extraordinary boom in semiconductor exports fueled by the prolonged surge in global investment in the artificial intelligence sector.
The OECD now expects South Korea’s economy to grow 3.7 percent this year, an unusually large upward revision from the 2.6 percent it forecast just three months earlier. That would also mark the fastest expansion since 2021, when the economy grew 4.7 percent as both the country and the rest of the world began emerging from the shadow of the COVID-19 pandemic.
Despite this surprisingly strong growth outlook, domestic media reports continue to express concerns about the vulnerability of an economy that has become excessively dependent on a single industry, semiconductors.
They point to the continuing weakness of domestic sectors outside semiconductor manufacturing and the resulting uncertainty felt by much of the population about their economic future. Domestic service sectors are much more important than exports given their large share of employment and impact on the household balance sheets for a big number of people.
Using Bank of Korea data calculated on a four-quarter moving-average basis to identify annual trends, South Korea’s real gross domestic product grew 2.8 percent from a year earlier during the four quarters through the second quarter. That performance was possible almost entirely because manufacturing, including the semiconductor industry, recorded a remarkable growth rate of 5.1 percent.
On the same four-quarter rolling basis, construction output fell by as much as 5.6 percent. The size of the decline is striking enough, but even more alarming is that the contraction has continued for 11 consecutive quarters.
It could be argued that higher economic growth eventually benefits everyone, even if manufacturing was virtually the only sector recording an unusually strong and potentially temporary expansion.
The government could use unexpectedly large tax revenues to repay public debt, increase public investment in productive areas or strengthen welfare programs that may have received insufficient attention in recent years.
Such arguments cannot simply be dismissed, but neither can they be accepted as entirely correct or certain to produce desirable outcomes. The government has already announced plans to spend unexpectedly higher tax revenue on projects whose political motivations remain controversial, rather than using the money to reduce public debt that has itself risen much faster than expected.
Meanwhile, many people find it increasingly puzzling that there is little evidence that government officials are treating the prolonged weakness and declining competitiveness of domestic-demand sectors with sufficient urgency.
Nor is there much indication that authorities are conducting rigorous analysis of the underlying causes and using the findings to design measures capable of addressing structural problems and producing sustainable improvements over the longer term.
Complaints are growing that major government policies have failed to address South Korea’s fundamental problems and, in some cases, have instead enlarged relatively minor problems while making potentially manageable ones more difficult to resolve.
Recent results from regular opinion polls show that public approval of President Lee Jae Myung’s job performance has fallen by nearly half in just several months, while disapproval has more than doubled.
Policy credibility matters
Dissatisfaction with the government’s real estate policies appears particularly severe and unlikely to subside quickly. Real estate accounts for the largest and most important share of household assets in South Korea.
In little more than a year since taking office, the government has announced several housing-market measures, most of which have been widely seen as having been introduced without sufficient deliberation or extensive public discussion and remain controversial.
Just one week before the local elections in early June, single-stock leveraged exchange-traded funds began trading in South Korea. From their launch, the products exerted enough influence to affect the direction of the broader market and distort several indicators.
Coincidentally, they began falling immediately after the election, contributing to an unnecessarily volatile decline in the overall market. Supplementary measures were announced, but many individual investors are reported to have suffered substantial direct or indirect financial losses from the products.
Along with housing policy, the controversy has further aggravated public dissatisfaction and weakened already fragile consumer sentiment.
According to a survey conducted by PMI for media company Edaily ahead of the Chuseok holiday, a majority of respondents disapproved of measures announced by the government across most major policy areas, including real estate taxation, job creation, judicial reform, labor-management relations and inflation, suggesting that dissatisfaction extends beyond any single economic or political issue.
Lee might argue that positive outcomes occasionally emerge only after initial negative effects and that some structural reforms cannot be abandoned because they are necessary for future generations, even when they impose a certain degree of pain on people living through the transition.
Yet what many people hoped the administration would achieve was, at a minimum, transparent policymaking, open public debate and measures based on market principles, together with rational methods for evaluating their results.
Policies that the public cannot reasonably understand are flawed from the outset and highly unlikely to succeed. Against this backdrop, Lee has openly declared that, despite complaints, he would continue pursuing his policies without changing course, focusing on what he described as good citizens.
Such thinking is potentially very dangerous in itself because it presupposes a division between good citizens and others, while carrying the implication that those who support the president’s position belong to the former group.
A policy should ultimately be judged by whether it contributes to improving the welfare of the public and reinforcing the system of private property on which a market economy depends.
If it fails to make a positive contribution to either objective, policymakers should recognize that failure, reconsider their assumptions and change course rather than insisting that persistence itself demonstrates correctness.
- - -
Yoo Choon-sik
Yoo Choon-sik is a senior AI correspondent covering Korea for MLex Market Insight. He has worked for international media organizations for about 30 years, including as Reuters’ chief economics correspondent in Korea. The views expressed here are the writer’s own. — Ed.
khnews@heraldcorp.com
