South Korea’s fertility rate, which was 1.05 in 2017, is projected to have dipped under 1.0 in 2018 – the lowest of low fertility rates globally, with the exception of one or two city-states. The drop is astonishing if we consider the actual number of newborn children. In the early 1970s, more than a million children were born annually in South Korea. This number has dropped to less than 400,000.
The situation is worthy of the phrase “demographic cliff.” Why is South Korea, with the eleventh largest economy in the world and a healthier fiscal situation than China or Japan, failing to address this problem?
The answer is that it lacks social agreement, resulting in insufficient and ill-timed policy responses. There is a widespread belief that the population decline is not much of an issue. Proponents argue that South Korea, with its small land mass, is suffering from too many people, so a decreasing population is a good thing. Some also argue that technological advances, such as artificial intelligence, allow the country to cope with a decreasing working age population. They also say that high youth unemployment illustrates that the population shortage is “not real.”
Let’s review these points. The notion that too many people is a problem has persisted since the time of the English scholar Thomas Robert Malthus, who wrote on the issue of overpopulation in the late 18th and early 19th centuries. More recently, even movies and novels have been motivated by the idea that the suffering of the human race could be resolved through a decrease in population. Overpopulation seems to agonize people in societies where limited resources such as land play an important role.
However, this argument neglects the fact that the current demographic cliff is not an issue of population size but of demographic structure. A 1 percent drop in population does not mean that each age group decreases by 1 percent; it means a large drop in the newborn population. The proportion of youth decreases, whereas the proportion of elderly increases. This, combined with long retirement years in modern society, rapidly increases the number of retirees outside the labor market who need to be supported by the young. The need to support the elderly, which was not an issue in Malthus’ days, is an important issue today, as the elderly live longer lives.
Some might argue that individuals can prepare adequately and support themselves. They will not have to depend on the next generation if they save enough money and invest in real estate before they retire. However, any form of life savings, whether savings or real estate, is a right of claim to use the goods and services produced by the younger generations; they are not objects of consumption.
Even if one saved a large amount of money or held masses of real estate, one cannot earn or even preserve the value of these investments if there is nobody to produce and pay rent in the next generation.
As Adam Smith emphasized, the wealth of nations increases not when one hoards jewelry, but when there are more things to buy with the hoarded jewelry. If the working age population decreases continuously, life savings becomes less effective. This applies to national finances, too. Without a healthy demographic structure, there cannot be a healthy fiscal situation.
Youth unemployment is closely related to the demographic structure. If the number of youth decrease, domestic demand also decreases. Youth create massive demand as they get married, give birth and raise children. When this population declines, demand declines with it, and so does domestic demand, which would have otherwise created many jobs. Uncertainty means that soon-to-be retirees will continue working and employers will decrease new employment rates.
Thus, the shock of decreasing demand and jobs caused by a decline is the youth population is not shared by all age groups, but is instead focused on the youth. In the long run, youth employment will increase once the baby boom generation retires, as in the case of Japan. But because of reduced demand, they will not be able to expect high wages.
Some might argue that while a low fertility rate can cause structural demographic issues, it can also help problems caused by overpopulation. This is not likely to be true. In the natural world, resource-use per unit increases when total population decreases, recovering equilibrium. This mechanism is not at work in human society. For example, even if the population decreases, if monopolies or oligopolies take over limited resources such as land or if entry barriers increase, the economically weak will not gain any resources, but instead act as scapegoats for rent seekers.
Also, if the decreasing population moves to hyper-urban areas such as the Seoul Metropolitan area, overpopulation in the core will not be resolved, while rural areas become devoid of people. This is the case in Japan, where the area near Tokyo is overpopulated while the population in rural areas is nearly extinct.
Will technological innovations solve population issues?
If artificial intelligence or robots are developed to substitute for labor through technological innovation, it might solve the side effects of the distortion in the population structure. When considering technological innovation as a fundamental factor in determining economic growth, this idea is not without evidence. An economy with a fertility rate of 2.0 is preferable to one with a rate of 5.0 or 6.0 when it comes to promoting technological innovation and increasing resource delivery to individuals. The problem is whether there will be continuous technological innovation amid a reduction-oriented economy where the lowest of low fertility rates persists.
Technological innovation is not just a given. Elementary technology can be brought in from abroad, but advanced technology with high value-added needs to be directly developed or purchased with a larger amount of loyalty. In other words, to enable continuous technological innovation, investment in research and development is crucial. As the Nobel prize -winning economist Paul Romer pointed out, research and development depend highly on economies of scale. When one person develops knowledge, many people can benefit from it.
When market size is bigger, the productivity of knowledge creation is higher, and there is more incentive to conduct research and development. Certainly, it’s possible to target foreign markets in research and development, but this is not realistic in all areas and is not a simple task for many reasons. Maintaining market size and assuring that the market is not shrinking are important in promoting technological innovation and entrepreneurship. In a reduction-oriented economy, youth are driven towards stable occupations such as public service and public enterprises, while risk taking, which is the foundation of technological innovation, is avoided. Additionally, the aging of researchers and entrepreneurs who manage technological innovation is inefficient for the purposes of innovation.
Why is it difficult to sufficiently respond to low fertility?
Even if the aforementioned reasons are enough to justify the need to solve the issue of extremely low fertility, it is not easy to immediately reflect and implement this in the government’s budget. Most side effects of low fertility and the demographic cliff occur in the mid to long term – in other words, with a time gap. For example, ultra-low fertility will reduce the population entering the labor market in 15 to 20 years, while in the short-run, it will reduce the burden of child rearing.
In the case of South Korea today, the proportion of working age people (15-64 years old) among the total population is over 70 percent. The population problem will not be felt immediately. As the proportion of the working age population gradually decreased beginning in 2018, some problems cropped up in domestic business conditions and with the number of employed. However, not a lot of people consider this an urgent matter.
Following this trend, in a few decades it is expected that the proportion of working age population will fall under 40 percent, yet it remains difficult to generate political support to immediately invest resources in the future. The majority of the electorate can easily believe that low fertility measures are irrelevant to them.
Even in developed countries such as the US, it is reported that in regions with a large proportion of aging people, expenses for children are decreasing. In a situation where the political voice of youth is withering, it is difficult to implement drastic approaches to solving low fertility problems, such as building infrastructure, reducing education expenses, and solving housing issues.
On the contrary, regressive rent-seeking activities such as opposing the establishment of public rental housing for youth and newlyweds and opposition to establishing national public kindergartens are more active. The budget for low fertility countermeasures will inflate as it comes to include policies that are irrelevant to low fertility.
A quality, all-day childcare system a first step
Among countries that have experienced low fertility issues before South Korea, some were relatively successful in addressing the problem. This includes the Scandinavian countries, France, and the United Kingdom, where the birth rate recovered to reach a level between 1.9 and 2.0. These countries share a commonality in that they implemented bold government expenditures with support from the entire nation and succeeded in creating a socially friendly environment for birth and child rearing.
When the birth rate in France reached 1.79, it declared a national emergency, and afterwards invested large amounts to recover from low fertility. France, the United Kingdom, and Sweden’s public spending on families amounts to between 2.9 percent and 3.8 percent of annual gross domestic product (GDP), considerably higher than South Korea’s 1.1 percent.
In contrast, Germany, Japan, and Italy are countries that were relatively unsuccessful, with birth rates remaining around 1.4. They spend between 1.3 percent and 2.2 percent of GDP on families, less than the United Kingdom and France, and it is relatively difficult for women to simultaneously have children, raise children and work.
As is commonly known, it is extremely difficult in South Korea for women to maintain a balance between work and family. While housing and child-care costs (including the cost of time) are expensive, youth income is also small. A dual-income family where both the husband and the wife work is almost a necessity, yet it is difficult for work and family to coexist, making it easier for the younger generation to choose to give up on marriage and having children.
Recent statistics reveal that the number of married women whose careers have been interrupted has increased. It is quite clear what the younger generation thinks about this reality. Also, in the majority of workplaces, excluding a few public sector jobs, employers consider women’s pregnancy and childbirth as factors that decrease productivity. From a female perspective, there is insufficient infrastructure to entrust their children to the care of others at an affordable price, so they give up having children or quit their jobs.
The older generation that grew up during a period of high fertility might not be able to easily understand the worries of the young and prospective parents. However, we should face the reality that the village community that once filled the needs of a child rearing infrastructure in the past has disappeared. The days when children grew up running and playing in alleyways have passed, and the hourly care of children has become an expense. A majority of these expenses become burdens for parents.
The first step to solve this problem is for the state to perform some child-rearing functions, and thereby alleviate the excessive burden on individuals.
The top priority for achieving this is to establish a quality “all-day childcare system” so that women can have both work and family. Although the current government has been credited with improving the childcare system, the budget is not large and changes are meant to be implemented gradually over the long-term. In actuality, there are many cases where childcare services operate with minimal resources, aiming simply to fill time.
We don’t have much time to solve the low fertility problem. The longer it takes, the more severe the financial burden will become. South Korea needs a tectonic shift. A world-class all-day childcare system should be established with no budget spared. If the social atmosphere surrounding childbirth and child rearing can be shifted through this, the ultra low fertility problem could be solved on one level, and women’s participation in economic activities could accelerate, helping to create jobs.
Joonkyung Ha is an economics professor at Hanyang University. This is reprinted with permission of the East Asia Foundation, a Seoul-based public service think tank.