South Korean Economy in 'Extreme Polarization' Amidst Semiconductor Boom

The prevailing outlook is that the South Korean economy will improve in terms of aggregate macroeconomic indicators. Key indicators such as GDP growth are predicted to show a positive trend. However, many citizens feel that these indicators are detached from reality. While economic indicators in the news are reported as good, individuals often perceive their personal economic situation as difficult and do not feel the improvement.

The gap between economic agents has widened to an extent that it is difficult to explain with the past term 'polarization.' As the growth of specific sectors fails to spread across the entire economy, economic inequality is intensifying, deepening structural problems.

Last year, South Korea's economic growth rate was only 1.0%, yet stock prices rose significantly. This demonstrates that real economic activities, such as corporate management and self-employed sales, do not always move in the same direction as asset price movements in the stock market.

The recent discrepancy between stock market adjustments and economic growth figures can be interpreted in a similar context. It is frequently observed that improvements in the performance of specific industries or companies drive overall market indicators amidst a general slowdown in the real economy.

The development of the semiconductor industry is deeply linked to the global technological hegemony war, and it is a product of complex factors that cannot be solely determined by specific government policies.

The government's role is to extend the duration and support the semiconductor boom so that it can have positive ripple effects throughout the real economy. However, many analyses suggest that it is difficult to credit the current semiconductor dominance to any specific government.

During the 2017 semiconductor supercycle, along with the export boom, domestic sectors such as consumption and facility investment also grew. At that time, the warmth from exports had a significant effect on domestic demand. However, the situation is different now.

Currently, the South Korean economy is almost entirely 'pulled by the scruff of its neck' by exports. The contribution of exports to economic growth in Q1 2024 was 5.4%p, much higher than 2.2%p in Q3 2017. This means exports account for an overwhelming share of overall growth.

Meanwhile, domestic demand sectors like consumption and facility investment are slowly recovering from their lows but are not showing the strong recovery seen in the past. The phenomenon of limited spread of warmth to the domestic demand sector, despite the export boom, continues.

This structure prevents the performance of specific export industries like semiconductors from evenly spreading across the entire economy, acting as a factor that deepens the gap between economic agents.

Despite the semiconductor industry boom, the positive warmth generated by it does not spread significantly throughout the economy. The semiconductor industry is characterized by a relatively low employment creation effect compared to other industries. Due to its highly automated and capital-intensive nature, employment does not increase proportionally even if production rises significantly.

Furthermore, even if wages in the semiconductor sector increase, this has a negligible effect on local economic recovery or household consumption growth. Ultimately, the performance of the semiconductor industry does not translate into overall economic vitality, acting as a cause of deepening industrial polarization.

This suggests that the importance of the financial market has grown significantly compared to periods when 'Dutch disease' occurred in the past.

Such a high stock market capitalization inherently carries the risk that changes in specific industries, such as semiconductors, can have negative ripple effects across the entire economy through the financial market. Fluctuations in a specific industry's conditions can lead to financial market instability, which can then trigger a vicious cycle affecting the real economy.

During the COVID-19 pandemic, government fiscal spending increased, and national debt also rose. How to utilize the currently projected surplus tax revenue presents a significant policy dilemma. On one hand, there are arguments that the increased tax revenue should primarily be used to repay national debt.

On the other hand, there are also strong voices advocating for aggressive fiscal spending to invest in future growth engines like semiconductors and to address deepening polarization. Political circles and the government face the challenge of determining the direction of fiscal spending amidst these conflicting demands.

If increased tax revenue during an economic boom is converted back into expenditure, there is a risk of the economy overheating. This is akin to carrying the risk of things getting even better when they are good, and even worse when they are bad.

Conversely, if the semiconductor industry enters a downturn, fiscal capacity might be exhausted prematurely, reducing the government's ability to respond to an economic recession. Ultimately, there is a possibility that the high volatility of the semiconductor industry will transfer to overall economic volatility through fiscal policy.

Currently, monetary policy maintains a tightening stance through interest rate hikes and liquidity absorption. The central bank is raising interest rates and withdrawing money from the market to curb inflation. However, the government's fiscal policy, conversely, is showing an expansionary stance, attempting to stimulate the economy by increasing fiscal spending.

This policy mix is criticized as inefficient, like turning on the air conditioner while simultaneously lighting a fire. There is a high risk that policy effects will be offset as monetary and fiscal policies work in conflicting directions.

While macroeconomic indicators may appear positive, the felt economic conditions of microeconomic agents show a significant difference. This indicates that a mismatch in policy directions can lead to overall economic confusion and inefficiency.

Recently, the unemployment rate has been rising, and the number of new employees has been decreasing. In particular, over the past year, the age group with the largest increase in unemployment was those in their 20s. The unemployment rate for those in their 20s rose by 1%p over the year, reaching 7%.

At the same time, the economic activity participation rate for those in their 20s fell by 0.8%p, showing the largest drop among all age groups. This indicator suggests that the phenomenon of young people abandoning job search activities is accelerating. It indicates that the younger generation is facing increasing difficulties in the labor market.

According to one survey, when asked if there had been changes in hiring after AI adoption, 31% of responding companies said they planned to reduce hiring. Among these companies, 60% responded that they would reduce hiring for new employees and interns first.

This indicates that companies, after adopting AI technology, are showing a 'seniority bias' that emphasizes years of service, and there is a growing tendency to reduce new hires without experience or for junior positions. This shows that it is becoming even more difficult for the younger generation to enter the labor market.

This ultimately leads to a burden on government finances, which is then passed on to all citizens. The current youth employment problem should not be viewed merely as an individual issue but approached from the perspective of future investment, considering the sustainability of future society and the burden of welfare.

Currently, South Korea's pension system is structured such that the elderly and middle-aged generations, on average, receive more in pensions than they contributed. In contrast, it is almost certain that today's young generation and future generations will not receive even as much as they contributed.

This intergenerational imbalance in pension benefits places a significant future burden on the younger generation. There is a lack of consensus that youth policies should go beyond mere welfare and aim to secure sustainable lives for future generations and the stability of the pension system.

Advanced technology sectors, such as semiconductors, are experiencing a severe shortage of skilled workers. Companies complain that it is difficult to find skilled young talent domestically, leading them to look overseas. This labor shortage is resulting in a trend of domestic companies hiring foreign talent.

In fact, the number of foreign employees working at the headquarters of domestic companies is increasing. This can be interpreted as a phenomenon where the employment difficulties of young Koreans and the supply-demand imbalance in advanced technology fields are occurring simultaneously.

A proposal suggests that the government or public sector can ease the burden of hiring new employees for companies through financial support. This would involve companies first hiring young people as interns, with the government covering a significant portion of the financial cost. This provides companies with an opportunity to vet talent and young people with valuable work experience.

However, it is argued that these internships must be structured to provide meaningful work, not just simple tasks, and conditions should be attached, such as a quota for conversion to regular employment after the internship, to ensure it leads to actual employment.

Such policies are expected to address youth employment issues, alleviate corporate labor shortages, and serve as a social investment for nurturing future talent.

This is attributed to the fact that while the number of policy items is excessively large and the overall scale seems significant, they do not genuinely influence the decision-making of newlyweds or those considering childbirth.

Despite various support measures, analysis shows that the perceived effect is minimal because each item is too fragmented. Policies are being implemented sporadically, failing to make a decisive contribution.

Therefore, limited resources should be concentrated on key areas that can change the decisions of economic agents to maximize their effectiveness. This principle should apply not only to low birth rate policies but also to overall youth support policies.