The Korean economy's long-term growth foundation is under scrutiny due to a simultaneous structural transformation driven by declining working-age population, the spread of artificial intelligence (AI), decarbonization, and global supply chain restructuring. Experts emphasize the urgent need for bold structural reforms to maintain growth momentum.
In a recent interview with Aju Economy, Lee Jae-won, head of the Bank of Korea's Economic Research Institute, identified 'transformation' as the key term that best represents the current state of the Korean economy from a long-term and structural perspective. He noted, "Our country's working-age population has already entered a declining phase. We are experiencing not only a demographic shift but also a digital transformation due to AI, a decarbonization transition in response to the climate crisis, and a global supply chain restructuring focused on economic security."
Lee highlighted that the semiconductor boom and improved trade conditions have significantly increased real incomes, stating, "The important thing is how we utilize the income and time provided by this boom." He stressed the need to solidify technological advantages in semiconductors while enhancing productivity in the service sector and small businesses, as well as addressing inefficiencies in labor market duality and capital allocation. "If we delay transformation, existing strengths may weaken, but if we effectively leverage the current boom, we can turn structural changes into a new opportunity for growth," he added.
Regarding the current economic situation, Lee acknowledged that while the economy has entered a recovery phase, there are disparities among industries. He explained, "The Korean economy has entered a recovery phase, but this recovery has not uniformly spread across the economy. It is more accurate to describe it as a 'strong but narrow recovery.'" He further noted, "The income generated from increased exports manifests as corporate profits, which then spread to investments, wages, sales of partner companies, and household consumption. At this point, the speed at which the recovery broadens is more important than whether it is recovering."
Lee pointed out a weakness in the Korean economy: the lack of ability to reallocate labor and capital to more productive companies and industries. As a solution, he suggested that support for small businesses should be differentiated based on productivity improvement and growth potential, rather than providing long-term support solely because they are small. He emphasized, "Now is the golden time for structural reform because the costs and resistance to reform may increase significantly after the aging population and fiscal burdens become more pronounced. The current period of increased income from the semiconductor boom is not a time to reduce the need for structural reform, but rather a time when we have the capacity to bear the short-term costs associated with reform."
On the issue of real estate funding concentration, he stressed the need for a shift towards productive investment. He stated, "Even with the same level of private credit, a higher proportion allocated to the corporate sector rather than households has been associated with higher long-term growth rates. Particularly, when funds are directed towards young small businesses and high-productivity firms, the growth effects are even more pronounced."
Lee projected that ultra-aging will narrow the scope for monetary policy operations by central banks. He explained, "In a recession, the policy interest rate approaches its effective lower bound, reducing the capacity for rate cuts. Conversely, in a situation where rigid expenditures such as pensions and healthcare increase alongside government debt, raising interest rates could significantly increase the government's interest costs. This creates a dual constraint where there is insufficient room to lower rates when needed and increased fiscal burden when rates need to be raised."
While the introduction of AI holds great potential to enhance macro-level productivity, Lee noted that the effects and timing of realization remain uncertain. Regarding AI's impact on the labor market and income distribution, he remarked, "Rather than entire jobs disappearing, it is more likely that the tasks that make up jobs will be restructured. For young people, the 'first rung of the career ladder' may weaken, but there is also significant potential for productivity improvement as they can quickly adapt to AI."
Born in 1975, Lee Jae-won graduated from the University of Wisconsin with a degree in mathematics and economics and earned his master's and doctoral degrees in economics from Princeton University. He has served as a professor at Rutgers University, a visiting researcher at the Federal Reserve Bank of St. Louis, and a professor at the University of Virginia before being appointed as the head of the Bank of Korea's Economic Research Institute and chief economist in 2023, gaining attention for leading the institute at a relatively young age.
* This article has been translated by AI.
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