Insight: South Korea stares down demographic dilemma

SEOUL Mon Oct 3, 2011 12:58pm EDT

1 of 6. People walk on the street in central Seoul in this December 19, 2010 file photo.

Credit: Reuters/Lee Jae-Won/Files

SEOUL (Reuters) - Kim, a doctoral student in her 30s, personifies many of the qualities that make South Korea such an economic force -- relative youth, education and ambition.

The trouble -- for corporations and policymakers -- is that she is equally typical by not wanting to have children.

"I just want to live happily with my husband without having to worry about kids or making sacrifices for them," said Kim, asking to be identified only by her surname.

South Korea is not alone in facing a plummeting birth rate and rapidly aging population -- neighboring Japan and China, as well as much of Europe, face similar challenges.

But it is getting there at astonishing speed. Over 40 years, it has gone from having one of the highest birth rates in the Organization for Economic Co-operation and Development (OECD) of advanced economies to the lowest, while life expectancy has surged.

OLDER, FASTER

By 2018, 14 percent of its population will be over 65, making it officially an "aged society." That is six years sooner than Japan and more than a century before France, according to the Samsung Economic Research Institute (SERI).

And by 2050 almost 40 percent of South Koreans will be senior citizens, likely the highest proportion in the world.

It has stark implications for South Korea's healthy state finances.

A report released by the Ministry of Strategy and Finance in July warned the national debt would jump to 138 percent of gross domestic product (GDP) in 2050 as pension and health insurance expenditures skyrocket, from around 34 percent last year.

The consequences for the country's manufacturing-intensive, export-led growth model may be even deeper.

Lee Sung-sik, a senior labor researcher at business lobby the Korea Chamber of Commerce and Industry, described the situation as "severe," with firms facing a double threat of insufficient labor supply and spiraling costs as they dole out regular raises and higher salaries to older employees.

Corporate Korea looks very vulnerable to shortages of new recruits and an aging workforce. Productivity remains relatively low, meaning output is sustained almost entirely by massive inputs of labor, including some of the world's longest working hours.

With working hours likely to fall and older workers' inexperience with new technologies pressuring productivity further, a shrinking labor force will slash South Korea's potential annual growth rate from over 4 percent to 1.7 percent in the 2030s, according to the Korea Development Institute.

Most economists estimate serious labor shortages won't start to appear until after 2019, when an exodus of baby-boomers leads to a declining working-age population, but many companies are already bracing for demographic fallout.

"(Labor shortages are) a problem that may affect the company's role in the industry in the future," warned a spokesman for Daewoo Shipbuilding & Marine Engineering, the world's third-biggest shipbuilder around 40 percent of whose production workers are already in their 50s.

"DIFFICULT TRADITIONS"

South Korea's "difficult traditions" have only exacerbated the decline in fertility rates that typically accompanies rising affluence and education, said Lee Sam-sik, head of the aging and low fertility research division at the Korea Institute for Health and Social Affairs (KIHASA), a government-backed think-tank that advises the administration on population policies.

These include a highly competitive school system that has pushed up the cost of rearing children -- as of 2007, Koreans spent proportionally more on private education than their counterparts in any other developed country -- and the belief that a mother's place is in the home.

"Raising children while working in Korea is the same as becoming 'superwoman' - you have to take responsibility for your work and your family," says 25-year-old female office worker Ryu. "Most companies usually make women (with children) feel uncomfortable."

According to Lee despite their "very high" education levels, around 60 percent of women drop out of the workforce when they get married, and of those who remain, around half leave when they have their first child.

GOVERNMENT STRUGGLES TO RESPOND

In 2006, the government launched a five-year "pro-natal" plan with a budget of 40 trillion won ($34.1 billion) to support measures to relieve the financial burden on young parents, such as increased daycare support and tax breaks.

This has arguably had an impact -- the number of babies born in 2010 rose 25,000 from 2009, to 470,000 -- but Lee says the limited funds involved are unlikely to truly turn the fertility tide.

A new five-year plan, launched this year with roughly double the budget, will promote a family-friendly line through textbooks and publicity campaigns, and attempt to improve the workplace culture for parents by boosting compliance with rules like a requirement that companies with over 300 female employees have dedicated daycare facilities.

Most firms will eventually have little choice but to better accommodate female and older workers as the alternatives dry up. Lee said there is "no consensus" on the kinds of policies that would permit the mass import of foreign labor in this highly homogenous society.

Reunification with the North could provide a solution, but that outcome is highly uncertain, and malnutrition may have damaged North Korea's younger labor pool, he added.

Some firms have already instituted policies to retain female and older employees. Samsung Group, the largest conglomerate, operates 17 centers providing daycare services for some 2,000 children between the ages of one and five.

The world's No. 3 steelmaker POSCO recently agreed with its union to extend the retirement age from 56 to 58, after which employees will still be eligible for a "re-employment process," according to a company spokesman. It has also introduced a "salary peak" system under which pay hikes and promotions are halted when workers hit 52.

But such steps have yet to be adopted more widely, analysts say.

"Companies need to emphasize training for older employees ... large companies have already taken action, but small and medium enterprises don't have the capacity for it," said SERI research fellow Lee Chan-young.

Many working women believe kindergartens or flexible working arrangements will only go so far, and that what is really needed is a fundamental shift in the views of employers.

A 27-year-old administrative officer who asked to be named only by her surname Shin pointed out many women hesitate to take full advantage of benefits like maternity leave for fear of how they'll be perceived by colleagues and managers.

"Even if I have the right to take leave, how can I use it? I want to work for a long time, but what kind of company will like and promote pregnant employees, who will work less than others? Thinking about all the expected disadvantages to married or pregnant women, it's hard to have kids."

Lee of the KIHASA admits even the best thought-out government policies can only go so far in dislodging entrenched attitudes. "We have very nice systems and regulations ... but (they) don't work in this society in practice."

(Additional Reporting by Seongbin Kang, Hyunjoo Jin and Cho Mee-young; Editing by Jonathan Thatcher)