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Back to Basics: Fiscal Space in a Low-growth Era
- Author Sungbae An
- Series273
- Date2023-10-06
Concerns have been raised about an even lower growth of the Korean economy after the coronavirus pandemic. As the Korean economy heavily depends on global demand for its products, the external sector will be the main source of possible structural change. The massive development of the global value chain led the growth of the Korean economy in the 21st century, but it is now stagnating and even declining under the prolonged strategic tensions between the United States and China. In the mean while, the Chinese economy, Korea’s largest trading partner, is experiencing a growth slowdown. An additional dimension that the Korean economy suffers from is the loss of relative competitiveness, as China’s manufacturing productivity is rapidly catching up with the Korea’s.
In this transition to a low-growth era, the role of the government is extremely important. It is a difficult task when a slower growth is expected, as fiscal space may be limited, especially right after the crisis measures were poured during the pandemic. Recently, the Korean government has been making efforts to improve the fiscal soundness. These efforts will restore the credibility of the fiscal soundness. Good ideas are urgently needed on how to strike a balance between securing fiscal space in the longer term and promoting productivity enhancing investment.
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