Korea's semiconductor windfall is becoming a concern

Lee Sang-ryeol

The author is a senior editorial writer at the JoongAng Ilbo. 

Korea's current account surplus reportedly exceeded the combined surpluses of economic powerhouses Germany and Japan in the second quarter. Annual exports are poised to reach $1 trillion for the first time. Growth forecasts are rising, with some suggesting the economy could expand by 4 percent this year.

Frankly, these impressive figures are largely attributable to the semiconductor boom fueled by artificial intelligence. Korea has effectively won an economic lottery.

Yet concerns are mounting at home and abroad. Like previous technological booms, the AI frenzy will eventually subside. What happens then? The International Monetary Fund has warned that Korea's vulnerability could increase if global AI demand undergoes a correction. Unfortunately, the economy lacks another industry capable of replacing semiconductors.

One concern is reckless government spending. Expansionary fiscal policy, backed by enormous tax revenues from semiconductor companies, has produced a proposed budget of 821 trillion won, up 12.8 percent. Bank of Korea Gov. Shin Hyun-song warned that permanent spending increases financed by temporary revenue would be difficult to reverse. His warning may have come too late, and the administration seems unlikely to listen.

Equally troubling is the neglect of essential economic reforms amid the semiconductor windfall.

Despite flourishing economic indicators, employment conditions remain bleak. Youth employment has declined for four consecutive years, while job quality deteriorates. Nine of every 10 jobs added this year are nonregular positions. Among workers in their 20s, 43.8 percent hold nonregular jobs. Countless Koreans cannot feel the benefits of 4 percent growth. A national employment initiative is urgently needed.

France, engulfed in violent protests, demonstrates what happens when governments postpone necessary reforms. Labor reform has stalled. Its statutory workweek is 35 hours, among the shortest in major economies, while annual working hours are reportedly 302 fewer than in the United States. Pension reform has also faltered. President Emmanuel Macron's plan to raise the retirement age from 62 to 64 has been postponed until 2028 following public opposition.

Korea is following a similar path. The government is pursuing a four-and-a-half-day workweek, while labor opposition has blocked proposals to exempt designated "megaproject" zones from the 52-hour weekly limit.

Pension reform has effectively been abandoned. Instead, the National Pension Service substantially increased its domestic stock holdings, declaring that it could not miss the market rally, only to suffer when share prices plunged. Rather than restructuring pensions so contributors pay more and receive less, it gambled on rising stocks.

Meanwhile, other industries are struggling against Chinese competition. Even automobiles, a pillar of Korean manufacturing supporting 1.5 million jobs directly and indirectly, face mounting pressure. Chinese electric vehicles have increased their Korean market share nearly ninefold in four years, from 4.7 percent in 2022 to 35 percent in this year's first half.

Despite this rapid advance, effective countermeasures are lacking. Protecting manufacturing ecosystems and employment cannot be left entirely to companies.

Chinese competitors face no equivalent of Korea's 52-hour workweek restrictions. They work longer hours without strikes, while Beijing provides extensive support for semiconductors, EVs, robotics and batteries.

To avoid France's predicament, survive Chinese competition and prepare for a post-semiconductor economy, structural reforms in fiscal policy, labor and pensions are indispensable.

Yet reforms have virtually disappeared from the political agenda. Perhaps the governing camp can concentrate on impeaching the chief justice rather than economic reform because the semiconductor boom makes everything appear healthy.

Lottery winners sometimes become miserable despite receiving extraordinary fortunes. Countries can suffer similarly, as the phenomenon known as Dutch disease illustrates: A booming sector can undermine the broader economy by distorting investment and weakening other industries.

Korea must not mistake temporary semiconductor prosperity for lasting economic strength. Without reforms, today's windfall could become tomorrow's vulnerability. That is why I am increasingly worried about our semiconductor lottery.