The Korean economy is facing challenges due to its rapidly aging population, but measures such as advancing AI technology, increasing labor force participation, and improving resource allocation could counteract these impacts, according to a recent International Monetary Fund (IMF) report. The economy, which has maintained stability through various shocks with robust economic policies, is experiencing slowed potential growth.
Forecasts indicate that Korea's swift demographic aging will likely diminish the labor supply and curtail investment demands, further lowering economic expansion and living standards. The labor force may shrink by over a quarter by 2050, which could cause an average annual decrease of 0.67 percentage points in potential growth, as detailed in the IMF's latest Article IV report.
However, reforms could mitigate these negative effects. Specific measures include increasing labor participation among women and the elderly, potentially raising the participation rate for older workers by 3 percentage points and reducing the female participation gender gap by half. These changes could offset about one-fifth of the aging impact by 2050.
In addition, enhancing resource allocation across different firms can boost overall productivity growth. Such improvements can be achieved by lowering obstacles related to business operations, facilitating access to finance, and eliminating biased subsidies. In scenarios where there is a reduced productivity gap between top-performing and less efficient firms, growth could increase by 0.22 percentage points annually on average, equivalent to roughly one-third of the effects of aging.
The report also emphasizes the positive role of artificial intelligence in bolstering potential growth. Broad AI adoption could increase annual growth by up to 0.44 percentage points through three main economic channels.
Overall, the IMF suggests that combining increased labor participation, more efficient resource distribution, and enhanced AI adoption could fully offset the negative economic effects of population aging. Accelerating these reforms is seen as critical for generating early economic growth, gaining public support, safeguarding against potential shocks, and freeing up government funds to address the needs of an aging society.
Rahul Anand, the IMF mission chief for Korea, along with economists Diaa Noureldin, Zexi Sun, and Xin Cindy Xu, have elaborated these findings in the IMF’s 2024 country report on Korea and a joint report with the Bank of Korea titled “Transforming the Future: The Impact of Artificial Intelligence in Korea.”