Stimulus Spaghetti: South Korea’s Scramble to Juggle Growth Levers

Executive Summary

South Korea’s economy faces a perfect storm: a 0% growth forecast for 2024—the worst non-pandemic performance since 2009—amid stagnant domestic demand and U.S. tariff headwinds. The Yoon administration’s response—a cocktail of SME debt relief, consumption vouchers, and AI-driven industrial policy—reveals a government caught between fiscal pragmatism and political imperatives. As overlapping stimulus programs strain budgets and structural weaknesses persist, Seoul’s economic playbook risks becoming a case study in policy overload.

The SME Policy Maze: When Gift Certificates Collide

Dueling Stimulus Tools

The Onnuri gift certificate program, once the centerpiece of small business support, is being eclipsed by President Yoon’s preferred local currency initiative. Despite annual budget increases (from 2.5 trillion won in 2020 to 5.5 trillion won in 2024), Onnuri has missed issuance targets for four consecutive years, achieving just 86% of its 2023 goal. The new local currency scheme—backed by 6 trillion won in supplementary budget allocations—now threatens to cannibalize its predecessor, creating fiscal redundancies.

The Efficiency Paradox

• Onnuri’s 5-10% discounts require 39 billion won in annual subsidies but show diminishing returns
• Local currencies’ regional restrictions limit economies of scale, with 28+ separate systems
• Projected 400 billion won budget request for Onnuri in 2025 signals political gridlock

As Yonsei economist Jungsik Kim notes: “Administrative inefficiency grows exponentially with each new local currency system.” The result is a Balkanized stimulus landscape where 60% of small businesses report no meaningful policy impact.

Debt Relief Roulette: Moral Hazard vs Economic Survival

The Bailout Calculus

Seoul’s three-pronged debt relief program—90% principal reductions, 7+ year debt cancellations, and interest rate caps—aims to rescue 3.2 million indebted SMEs. Yet critics highlight alarming tradeoffs:

1. 6 trillion won in potential taxpayer liabilities from KAMCO’s bad bank purchases
2. Blurred eligibility criteria risking “serial debt adjustment” behaviors
3. Reverse discrimination against compliant borrowers facing 5.25% base rates

The Productivity Question

While 78% of SMEs support relief measures, only 23% believe they’ll improve long-term viability. As Sejong University’s Kim Dae-jong warns: “Debt forgiveness without productivity gains merely kicks the can down the road.” With SME loans/GDP at 104%—double 2008 levels—the program tests how much financial engineering can substitute for structural reform.

The 0% Growth Trap: Exports, AI, and Missing Multipliers

Domestic Demand Mirage

Despite 13.9 trillion won in consumption coupons, real household spending grew just 0.3% Q2 2024. The travel card boom (8.5% YoY growth in overseas card usage) underscores deeper issues: consumers chase arbitrage opportunities (air miles, FX discounts) rather than driving broad-based demand. Meanwhile, the comprehensive real estate tax tweak—raising fair value ratios from 60% to 95%—could extract 2.4 trillion won annually but risks chilling a housing market already down 11% from 2021 peaks.

Export Reliance Redux

With exports contributing 94.6% of 2023’s 2.04% GDP growth, U.S. tariffs on 25% of Korea’s steel/auto exports threaten to erase 0.8 percentage points from growth. The AI moonshot—exemplified by Sendbird’s 7 billion monthly AI-processed messages—offers hope but requires scaling: tech startups comprise just 1.3% of GDP versus 8% in Silicon Valley.

Conclusion: The Coherence Deficit

South Korea’s economic team faces a trilemma: immediate SME relief vs fiscal sustainability, consumption stimulus vs export competitiveness, and AI aspirations vs regulatory inertia. The 31.8 trillion won supplementary budget buys time but exacerbates policy fragmentation. To avoid Japan-style stagnation, Seoul must reconcile its 87 separate SME support programs into unified frameworks and pivot from debt-driven survival to productivity-focused investment. As the Onnuri/local currency clash shows, good politics rarely aligns with sound economics—but at 0% growth, the margin for error has vanished.