South Korea seems to be winning the battle against COVID-19. It has been recording little more than a handful of new cases per day for weeks, and though it is now preparing for that rate to rise, following the relaxation of social-distancing guidelines, it seems likely to remain in control of the outbreak. The bigger question is whether it can contain the economic fallout.
It took South Korea just two months to tame the first wave of COVID-19. Despite its proximity to China, where the outbreak’s first epicenter was located, it has kept infection and fatality rates much lower than the United States and the hardest-hit European countries. In fact, its death toll – 267 people, as of May 24 – amounts to just five per million population, compared to 300 in the US, 544 in Italy, 555 in the United Kingdom, and 600 in Spain.
Having endured outbreaks of severe acute respiratory syndrome (SARS) in 2003 and Middle East respiratory syndrome (MERS) in 2015, South Korea’s leaders knew that containing COVID-19 would require fast and aggressive action. So, just three weeks after the release of the novel coronavirus’s genetic sequence, they granted fast-track approval for test kits. They then launched a massive testing campaign and an intensive contact-tracing program, which used cellphone GPS records, credit-card payment information, and CCTV footage to identify and inform people who may have been exposed to the virus.
South Koreans – who are accustomed to adhering to social norms and generally have a positive view of strong government intervention, which drove the country’s economic success over the last half-century – willingly cooperated with the stringent containment measures. They wore masks in public and practiced social distancing. They sacrificed privacy in the name of contact tracing. And those who were exposed reliably quarantined themselves.
South Korea’s COVID-19 response also benefited from robust medical infrastructure. According to OECD statistics, South Korea has 12.3 hospital beds per 1,000 people – more than four times the rate in the US (2.8 beds per 1,000) and Spain (three beds per 1,000).
Moreover, with mandatory health insurance for all, South Korea ranks first in the OECD for health-care access. By contrast, in a 2019 Gallup poll, 25% of Americans reported that they or a family member had delayed medical treatment for a serious illness due to the costs of care. Differences in access to health care, together with deeply entrenched economic inequalities, explain why COVID-19 has hit black and Latino communities the hardest in the US.
There was, however, a downside to South Korea’s COVID-19 response: by drastically curtailing social activity, it weakened domestic demand and employment. Some 476,000 jobs disappeared in April, compared to April 2019 – the largest such decline since February 1999, after the Asian financial crisis. From January to March, manufacturing shipments and retail sales shrank 4% and 6.4%, respectively, and real GDP fell by 1.4% compared to the previous quarter.
Of course, the problem is not merely domestic. The entire global economy is suffering, and external demand is plummeting – bad news for South Korea’s export-oriented economy. Already in April, shrinking global trade caused South Korean exports to plunge by 24.3% year on year – again, the sharpest drop since after the global financial crisis. A recession is beginning to look all but unavoidable, with the International Monetary Fund projecting that South Korea’s GDP will contract by 1.2% in 2020.
Just as it has pursued a proactive public-health response, South Korea’s government is taking action to minimize the pandemic’s economic consequences. It has launched massive fiscal-stimulus packages totaling 245 trillion won ($200 billion), or about 10% of GDP, to support affected households and businesses, ease liquidity constraints, and boost consumption. The Bank of Korea has slashed interest rates.
But stimulus, no matter how bold, will not be enough to mitigate the economic impact of the COVID-19 pandemic. The government must also undertake reforms to address the longer-term trends undermining growth, including rapid population aging, structural imbalances and inefficiencies, and slow productivity growth, especially in the services sector.
Before the pandemic, South Korea’s growth rate was already falling steadily, reaching just 2% in 2019. This partly reflects rapid population aging. Last year, total fertility fell to an all-time low of 0.92 children per woman. According to Statistics Korea, the working-age population peaked in 2018, and will fall by more than 30% by 2046. South Korea’s elderly population is growing at the fastest pace in the world.
Moreover, the dominance of large manufacturing exporters hurts small firms and the service industry, damaging overall productivity growth and fueling inequality. And inefficiencies in product and labor markets inhibit business performance and national competitiveness.
So far, South Korea’s government has failed to respond effectively to these challenges. Instead of pursuing structural reform, the left-wing administration has expanded unproductive public spending and public-sector employment. Furthermore, it has tightened regulations on businesses, discouraging investment and innovation. For example, it recently banned Tada, a ride-sharing service, to appease protesting taxi unions.
The COVID-19 crisis represents an opportunity to change course. To address its shrinking labor force, South Korea needs reforms to improve labor-market flexibility, strengthen market competition, encourage female employment (including through expanded childcare), and deliver life-long education and skills training.
To reduce dependence on exports, the government should create a more supportive environment for high-value-added services industries. It should also improve conditions for private investment and research and development.
South Korea has rightly received international acclaim for its COVID-19 response. It should now apply the same ambition and acumen to lay the groundwork for a more productive, sustainable, and inclusive economy.
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