Given the daunting challenges facing Japan, one can only admire Japanese Prime Minister Shinzo Abe’s determination to end the country’s two-decade-long period of economic stagnation. His strategy — the “three arrows” of massive monetary expansion, increased government spending and structural reform — is theoretically sound. However, only one-and-a-half arrows have been launched so far.
The stimulus package is being offset by consumption-tax hikes aimed at reducing Japan’s massive debt burden — a process that will lead many Japanese consumers to adjust their spending downward. The promised structural reforms of the energy sector, labor market and competition policy have yet to be introduced, and appear unlikely to take effect anytime soon. Even more worrisome are larger immutable realities — like a rapidly aging and shrinking population — that will limit Japan’s economic growth in the coming decades.
However, Japan’s problems are not unique. Indeed, its neighbor and historical rival, South Korea, is headed down a similar path. The difference is that South Korea may still have time to ameliorate these trends, and avoid a Japanese-style quagmire of permanent low growth and long-term decline.
South Korea — the seventh-largest trading country in the world and one of the most prominent economic success stories of the past 50 years — is at risk of such a bleak future as a result, first and foremost, of demographics. South Korea’s working-age population is falling by 1.2 percent annually — the fastest decline among Organisation of Economic Co-operation and Development (OECD) countries.
While there are many reasons for South Korea’s low fertility rate, two economic factors stand out. First, household-debt levels are enormous, capturing a quarter of income, with mortgage payments taking the lion’s share. The ratio of housing prices to incomes is more than double that of the US.
Second, South Korean families feel compelled to spend a large share of their income (10 percent, on average) on education. With households already saving only about 4 percent of their disposable income, compared with 20 percent in 1988, there is little room for additional expenditure.
A concomitant feature of South Korea’s labor market is that women’s labor-force participation rate — a paltry 33 percent for women aged between 30 and 39 — is among the lowest in the OECD. This partly reflects the difficulty of balancing child-rearing with work in South Korea, compared with, say, Europe or the US.
South Korea’s female labor-force participation rate is even lower than in Japan, where there are waiting lists for childcare.
Moreover, South Korea has underinvested in day-care centers, with firms rarely offering childcare support. Given that South Korean women tend not to hold lucrative jobs, the cost of childcare is often prohibitive.
The recent increase in South Korea’s minimum normal retirement age has done little to improve the labor-market outlook. Wages in the small and medium-sized enterprises (SMEs) that employ 88 percent of workers still lag behind those of major conglomerates, the chaebols, and the middle class is shrinking in terms of its share of earnings.
However, South Korea does have some advantages over Japan. Although the government’s stimulus policies have increased the national debt, the debt-to-GDP ratio remains relatively low, at roughly 37 percent. Public debt in Japan, by contrast, exceeds 220 percent of GDP.