Korea's Rapid Aging Doesn’t Have to Be Economic Destiny
IMF News, April 3, 2025
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Bibliographic details
- Authors: Rahul Anand
- Published: April 3, 2025
Key findings and context
- Strong economic fundamentals and sound macroeconomic policies have helped the Korean economy through multiple shocks in recent years.
- Potential growth has slowed more quickly than in other major advanced economies, and the economic expansion is likely to moderate this year.
- Korea is aging more rapidly than almost all others, which is likely to reduce the labor supply and weigh on investment demand, further lowering growth and diminishing living standards.
- Aging could shrink the labor force by more than a quarter by 2050, leading to an average annual decline of 0.67 percentage point in potential growth, according to the Article IV report.
Impact of aging on the economy
- Labor supply reduction: aging-driven demographic change could shrink the labor force by more than a quarter by 2050.
- Growth drag: the demographic shift is projected to lead to an average annual decline of 0.67 percentage point in potential growth.
- Investment demand: aging is expected to weigh on investment demand, compounding the growth slowdown and reducing living standards.
Reform scenarios and quantitative impacts
- Labor market participation reforms
- Assumptions: participation rate for older workers increases by 3 percentage points; the gender gap for female participation is expected to decrease by half (drawing on experiences in other advanced economies).
- Impact: such improvements would offset about one-fifth of the aging impact by 2050.
- Resource allocation reforms (within-sector reallocation)
- Objective: improve efficiency of resource allocation across firms within sectors by channeling labor and capital toward fast growing firms with higher productivity.
- Policy measures suggested: reducing barriers to opening or closing a business, enhancing access to finance, removing distortive subsidies.
- Impact: in a reform scenario assuming a smaller productivity gap between the top and bottom performing firms, average annual potential growth could increase by 0.22 percentage points. That would be equal to about one-third of the aging impact.
- Artificial intelligence adoption scenarios
- Channels through which AI could affect the economy:
- Labor displacement: AI replaces people in some jobs, increasing productivity but reducing labor demand.
- Labor complementarity: AI complements people in some roles, increasing productivity without eliminating their jobs.
- Overall productivity increase: AI boosts productivity across all jobs, raising overall labor demand.
- Impact: AI adoption across all three channels could significantly increase average annual potential growth by as much as 0.44 percentage point.
Combined effects and policy implications
- Combined impact: the combined effects from a higher labor force participation rate, more efficient allocation of resources, and expanded AI adoption can more than fully offset the economic drag from aging.
- Timing and public support: accelerating reforms would deliver growth gains early and earn more support from the public.
- Resilience and fiscal space: faster reforms would help defend against potential shocks and increase room in the government budget for adapting to an aging society.
Article by Rahul Anand, Diaa Noureldin, Zexi Sun, Xin Cindy Xu — April 3, 2025; based on IMF’s 2024 country report on Korea and a joint selected issues paper with the Bank of Korea, “Transforming the Future: The Impact of Artificial Intelligence in Korea.”
Content in this bundle
- 1korea2025001-print-pdf
- 1. AI-Related Policies and Regulation Initiatives in Korea