Aging Nation, Shrinking Growth: KDI Sounds Alarm on Korea’s Fiscal Outlook (Image supported by ChatGPT)
SEOUL, May 9 (Korea Bizwire) — South Korea’s long-term economic potential is facing a steep decline and could enter negative territory by the 2040s if structural challenges go unaddressed, the state-run Korea Development Institute (KDI) warned in a report released Thursday.
According to the report, “Projections for Potential Growth and Policy Implications,” South Korea’s potential growth rate is estimated to hover in the high 1% range in 2025 but is projected to plunge to near-zero by the late 2040s.
In a worst-case scenario, it could fall into negative territory by 2050 — signaling the possibility of a prolonged era of economic contraction.
The think tank attributes the decline to a toxic combination of rapid population aging, diminishing capital investment, and stagnant total factor productivity (TFP).
South Korea’s long-term economic potential is facing a steep decline and could enter negative territory by the 2040s if structural challenges go unaddressed, the state-run Korea Development Institute (KDI) warned in a report. (Image courtesy of Yonhap)
Demographic shifts are the most dominant driver. The working-age population (15–64) peaked in 2019 and has been shrinking ever since. Meanwhile, the proportion of elderly citizens (aged 65 and above) is expected to surge from 20.3% in 2025 to 40.1% by 2050.
The contraction in the labor force is already beginning to weigh on the economy. KDI projects labor input will turn negative around 2030, further dampened by lower productivity among older workers, who tend to earn less and participate less in the labor market.
Using three productivity-based scenarios — baseline (0.6%), optimistic (0.9%), and pessimistic (0.3%) — KDI forecast that potential growth could drop from 1.5% in 2025–2030 to 0.1% by 2041–2050 under the baseline.
Under the pessimistic scenario, growth could slip to -0.3% by mid-century. Even the most optimistic path suggests only 0.5% growth in the 2040s.
South Korea’s projected potential growth rate from 2025 to 2050 under three scenarios — baseline, optimistic, and pessimistic — as forecast by the Korea Development Institute. (Image supported by ChatGPT)
Assuming inflation and exchange rates remain at 2024 levels, per capita GDP in 2050 is projected to range from $44,000 to $53,000, depending on the scenario — an increase of 19% to 43% from the 2024 level of $36,113, but a far slower pace than in past decades.
To counter this trajectory, KDI recommends sweeping structural reforms: easing market entry barriers, overhauling restrictive labor regulations, and building performance-based compensation systems.
It also advocates policies to expand labor supply, including extending employment for older workers, improving work-life balance for women, and broadening the acceptance of foreign labor.
KDI also warned of looming fiscal pressures. As the tax base weakens and public debt surpasses GDP, the institute called for a redesign of aging-related expenditures such as public pensions and cautioned against repeated use of stimulus spending.
Finally, it raised concerns over monetary policy flexibility, noting that declining real growth could reduce the neutral interest rate and increase the risk of hitting the zero lower bound. In such a scenario, maintaining inflation expectations would require a reassessment of current monetary frameworks.
With South Korea’s economic clock ticking, KDI’s findings offer a stark call for proactive, long-term reform before stagnation becomes the new normal.
Ashley Song (ashley@koreabizwire.com)
