September 29, 2025
SEOUL – The International Monetary Fund’s latest forecast for South Korea offers a small lift laced with a warning.
Growth this year is projected at 0.9 percent, a notch above the IMF’s earlier estimate and neatly aligned with the Bank of Korea’s outlook. The uptick, fueled by resilient semiconductor exports and fiscal largesse at home, is the kind of revision Seoul is tempted to celebrate.
But it should not. Buried in the IMF’s analysis is a sharper verdict: Without structural reform, the government’s aspiration of 3 percent growth is a mirage.
The IMF’s mission to Seoul, which concluded this week, struck a familiar chord. It praised the Lee Jae Myung administration’s accommodative fiscal and monetary stance as suitable for an economy still below potential. Yet the plaudits ended quickly. To withstand the twin shocks of rapid aging and a shrinking workforce, South Korea needs more than stimulus checks and supplementary budgets. Long-term growth demands systemic overhaul — from pensions and health care to labor markets and industrial organization.
The diagnosis is not new. Demographics alone will shrink the working-age population in the coming decades, even as mandatory welfare spending rises inexorably. By 2029, more than 55 percent of government expenditure will be locked into obligations such as pensions and health insurance, crowding out discretionary investment.
Yet Seoul still operates without a fiscal rule, one of only two OECD members in that position. Attempts to legislate a debt ceiling and deficit target collapsed years ago, sacrificed to political expediency. For now, the government leans on its relatively modest debt-to-GDP ratio as proof of resilience. That reassurance grows thinner each year.
The international comparisons are equally alarming. The OECD this week lifted its global growth forecast to 3.2 percent, buoyed by stronger trade and investment. It even upgraded Japan — long the cautionary tale of stagnation — to 1.1 percent, edging past South Korea’s 1.0 percent projection. For a country that once treated Japan’s “lost decades” as a warning to avoid, the reversal should sting.
Labor and productivity reform is one obvious front. Korean workers log longer hours than most of their OECD peers but deliver lackluster productivity. Shorter working hours — a policy now under discussion — may be laudable for work-life balance, but without gains in efficiency, the economy risks grinding slower still.
Wage structures remain rigid, labor mobility constrained and the gulf between large conglomerates and smaller firms yawning. The IMF has urged a narrowing of this divide while preparing for the risks and opportunities of artificial intelligence. Yet little progress has been made.
The IMF’s call for fiscal consolidation may sound austere when domestic demand remains fragile. But the logic is sound: Expansionary budgets may be justified today, yet anchoring long-term discipline is essential to avoid a future debt spiral. OECD projections suggest public debt could more than double by mid-century if reforms are delayed, crippling the government’s capacity to invest in innovation and cushion shocks.
What makes the IMF’s warning sobering is its familiarity. Korean economists have long flagged eroding growth potential, yet each political cycle pushes reform further back. Pension restructuring is deferred, labor liberalization postponed and industrial policy muddled by populist giveaways. Instead of addressing the elephant in the room, policymakers offer stock market targets and consumption coupons. “Kospi 5000” may be the government’s rallying cry, but without underlying reform and productivity gains, it is a sandcastle at best.
The IMF’s modest upgrade may calm markets briefly. But its broader admonition should unsettle policymakers for years. South Korea cannot spend its way to 3 percent growth. Without rebuilding its fiscal base, retooling labor markets and investing in productivity, the economy will remain stuck in low gear — vulnerable to shocks, constrained by debt and weighed down by demographics.
