The Koreas | Economy | East Asia

South Korea’s Population May Have Already Peaked

Recent statistics suggest South Korea’s population may be aging even more quickly than previous worst-case scenarios predicted.

Troy Stangarone
South Korea’s Population May Have Already Peaked
Credit: Pixabay

Although the rapid aging and eventual decline of South Korea’s population has been projected for years, recent trends are exceeding even worst-case projections and pushing forward the point at which South Korea’s population declines and it experiences the associated economic headwinds.

In 2018, South Korea became the first country to see its total fertility rate fall to 0.98, which is significantly less than the rate of 2.1 that is required to maintain a stable population. It’s also below estimates of the total fertility rate required to maintain the current levels of economic consumption in South Korea.

Early estimates for 2019 suggest that South Korea’s total fertility rate continued to decline. Through November of last year, South Korea has posted 44 consecutive months of falling year-on-year births and seen overall births fall 7.3 percent from their 2018 levels. With deaths also outpacing births, November was the first month where South Korea’s population declined naturally since statistics began being tracked in 1981.

With birth rates continuing to decline, prior estimates of changes in South Korea’s population are proving inadequate. As recently as last year, Statistics Korea projected that South Korea’s total population would peak in 2028, with the worst-case scenario being that total population would peak in 2023. With the 2019 figures now largely known, Statistics Korea now estimates that the population will begin to decline overall this year and likely peaked in 2019.

One concern is that South Korea could enter into a low-fertility trap where the decrease in fertility becomes self-reinforcing and difficult to reverse due to a decreasing number of potential mothers coupled with shifts in the perception of the ideal family size and the benefits of having additional children if it means potential earnings prospects decline. With more women foregoing marriage and concerns about the education costs for children, South Korea already faces disincentives to reversing the current trends in fertility.

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The decline in population has implications for South Korea’s economic future. The working age population, those aged 15-64, began declining in 2016. The OECD already estimates that the decline in the working age population has begun to reduce South Korea’s economic growth potential, which is estimated at 2.5 percent for 2020. Previous OECD estimates had suggested that South Korea’s potential growth rate would not begin to fall below 2.0 percent until the early 2030s, but those estimates may need to be revised in the absence of productivity increases, which have been declining as well.

The economic implications extend beyond South Korea’s potential growth rate to how dynamic the economy may be in the future. While focused on business innovation, a recent study suggests that younger labor markets lean toward more innovation as young workers tend to be more creative and willing to take risks.

The creativity and talent that has allowed South Korea’s film and music industries to grow and prosper internationally in recent years – culminating in the film Parasite’s historic success at the 2020 Academy Awards — could see decline as well from the demographic changes. Cultural exports were worth more than $9 billion to South Korea in 2017, prior to Parasite’s recent success. At a minimum as South Korea’s population ages and declines there will be fewer talents to draw from to maintain South Korea’s current level of innovation and creativity in the arts and business.

For the South Korean government there are implications for future pension and healthcare costs. The United Nations previously projected that South Korea’s dependency ratio, or the percentage of the population over the age of 65, would grow from 17.5 in 2015 to 73.2 in 2050. However, those projections were based on a median outcome of the experience of similar countries. The proportion of the population over the age of 65 is now likely to grow much more quickly than expected, placing strains on government finance as there are fewer workers over the next two decades to pay the health and retirement costs of the elderly.

One factor potentially mitigating some of these consequences is the adoption of robotics and automation. While raising fertility and immigration are often seen as pathways to ease the economic consequences of a declining population, a 2018 study suggests that aging societies are more inclined to adopt increasing automation as labor pools decline and that industries that have adopted automation in response to a declining source of labor have seen their productivity increase.

South Korea currently has the highest density of robots to workers in the world and additional investments could help drive productivity improvements. Better integrating women into the workforce and working on ways to help older workers be more economically productive would also help to mitigate some of the economic consequences of a declining population.

While the economic challenges of South Korea’s demographic transition are often the focus, there are also implications for national security and unification with North Korea. With fewer young males to serve in South Korea’s largely conscription-based military, the government expects to reduce the size of the military from 600,000 troops to 500,000 troops by 2022 and focus more on using technology to replace personnel. If birth rates continue to remain low, additional cuts may be needed in the future.

With population decline setting in more quickly than expected, there are implications for unification with North Korea as well. It is increasingly unlikely that North Korea’s relatively younger population could help to reverse trends in the South, and for South Koreans dealing with an aging population the costs of unification could further reinforce polling that indicates that peaceful coexistence and a focus on the South Korean economy are preferable to unification.

The choices that go into whether to have a child and the implications those decisions have for an economy are complex and lack a single solution. South Korea does not need its total fertility rate to return to replacement level. However, it does need to continue government efforts, including those aimed at improving gender equality, to reduce the burdens that diminish incentives for having children, while taking steps to mitigate the economic costs associated with population decline in the short and medium turn. The continuing decline in births has only made these steps more urgent.