The Perils of Perpetual Stimulus: Korea’s Growth Gambit Meets Demographic Reality

Executive Summary

South Korea’s economic policymakers are navigating a narrowing path: attempting to revive growth through fiscal stimulus and stock market incentives while confronting structural headwinds from an aging population and global currency volatility. As the government raises growth forecasts and pledges to “mobilize all policy capabilities” for a 2024 recovery, critical questions emerge about the sustainability of short-term fixes in the face of deepening demographic imbalances and a fragile won. The interplay of these forces – fiscal ambition, labor market rigidities, and dependence on AI-driven exports – reveals an economy at an inflection point.

The Mirage of Sunset Clauses: Fiscal Discipline Erodes as Tax Breaks Become Permanent

South Korea’s tax code has become a museum of temporary measures, with 92% of expiring tax breaks extended in 2023 – including provisions first introduced in 1971. The mechanical renewal of these policies, from VAT exemptions for coastal shipping fuel to venture investment deductions, highlights a systemic failure to rationalize fiscal architecture. While the Ministry of Economy and Finance claims a 50-70% reduction in revenue losses from extended provisions, the pattern suggests institutionalized complacency. As Professor Kim Woo-chul notes, many exemptions now function as de facto permanent subsidies, distorting resource allocation while depriving policymakers of fiscal firepower for strategic investments in AI and decarbonization.

Won’s Precarious Slide: How U.S. Fiscal Drama Exposes Korea’s External Vulnerabilities

The won’s 7-month low against the dollar (₩1,463.3/USD) underscores Korea’s exposure to American fiscal turbulence. While the immediate trigger was retail investors’ record $12.8bn in U.S. equity purchases through October, deeper vulnerabilities lurk. The currency’s 8% depreciation year-to-date coincides with:

• A 56% projected surge in 2024 memory chip demand (Kyobo Securities)
• U.S. tariff impacts expected to slash 2024 export growth by 1.2% (KDI)
• Bank of Korea’s constrained ability to defend the won amid 3.5% CPI inflation

This trifecta reveals an economy caught between reliance on dollar-denominated tech exports and domestic inflation pressures exacerbated by import costs – a tension unlikely to ease as AI infrastructure investments boost demand for Nvidia GPUs and TSMC wafers.

Gerontocratic Economics: Banks Mine Silver Deposits as Labor Reforms Stall

South Korea’s demographic time bomb is reshaping financial and labor markets simultaneously. Commercial banks’ rehiring of 5,000+ retirees since 2021 – particularly for high-touch roles in pension management and SME lending – reflects both the ₩4,307 trillion in assets held by over-60s and a youth employment rate stuck at 58.9%. Yet this silver economy strategy risks entrenching intergenerational inequities:

1. Senior-focused trust services (now offered by all major banks) incentivize wealth hoarding rather than intergenerational transfer
2. Proposed retirement age extensions to 65 face resistance due to seniority wage systems that make older workers 2.3x costlier than peers in Japan

As lawmakers debate phased retirement reforms, the KDI’s warning against “excessive dependence on stimulus” takes on new urgency – no amount of PWM specialists can offset a 0.8% annual workforce contraction.

AI Lifeline: Semiconductor Bets and the Productivity Paradox

In this constrained landscape, Korea’s AI and semiconductor push has become existential. The government’s 2024 growth strategy leans heavily on:

• Tax incentives for long-term stock investments (targeting retail participation in AI-related equities)
• HBM4 chip mass production to secure 68% of the global AI memory market
• MSCI Developed Market Index inclusion to attract foreign capital

Yet the KDI’s upgraded 1.8% growth forecast remains below potential rate, revealing limits to tech-led growth. With Samsung and SK Hynix allocating $74bn to AI chips through 2028, success hinges on solving the productivity puzzle: automation may boost corporate earnings but does little to address Korea’s 15.4% SME productivity gap versus large firms.

Conclusion: The High-Cost Equilibrium

South Korea’s economic trajectory increasingly resembles a high-wire act – one where stimulus measures and AI ambitions must compensate for structural rigidities. The won’s weakness, while aiding exporters, complicates inflation control ahead of April’s parliamentary elections. Demographic headwinds demand labor reforms that clash with entrenched seniority systems. And the semiconductor bet, though rational, ties Korea’s fate to a hyper-competitive global AI race where even dominance guarantees only temporary advantage. For policymakers, the lesson is clear: perpetual tax breaks and retail stock incentives may paper over cracks, but only productivity-enhancing reforms can rebuild the foundation. The alternative – a stagnant economy with world-class chips and collapsing demographics – is a future no amount of HBM4 production can redeem.