Challenges Facing the Korean Economy and Strategies for Overcoming Them

Sung Jin Kang

Chair, Policy Committee, Hansun Foundation

Professor, Department of Economics, Korea University

In recent months, sources of instability across major economic indicators-such as the exchange rate, stock prices, real estate prices, industrial production, and consumption and investment-have shown little sign of easing. After navigating a series of global, overlapping crises, the domestic and external challenges now facing the Korean economy are raising concerns because they threaten not only a short-term slowdown but also the medium- to long-term growth outlook. Nevertheless, the Republic of Korea rose from extreme poverty, overcoming Japanese colonial rule and the devastation of war, and repeatedly weathered economic crises to achieve today's prosperity. As a result, gross domestic product (GDP) per capita reached USD 33,121 as of 2023, placing Korea among high-income countries. Heavy and chemical industries as well as the semiconductor and shipbuilding sectors-which have been nurtured since the early stages of development-possess world-class competitiveness, demonstrating Korea's capacity to stand shoulder to shoulder with advanced economies. This paper reviews the structural domestic and external challenges confronting the Korean economy, and explores how these can be transformed into new engines of growth so that a foundation for sustainable development can be passed on to future generations.

1. Domestic Challenges

The economic challenges confronting Korea have a complex character that goes beyond ordinary business-cycle fluctuations, and require structural and institutional transformation. Domestically, sustained growth is being constrained by a range of factors: heightened exchange-rate volatility in recent times; population decline and demographic shifts driven by low fertility and aging; stagnant productivity; instability in the real estate market; the accumulation of household debt; and delays in industrial restructuring. In particular, the fact that the pace of reorganization toward new growth industries is lagging behind global competition is identified as a key task that weakens the foundation for future growth. In the short term, domestic instability is most immediately reflected in exchange-rate movements. In 2024, the won-U.S. dollar exchange rate surpassed KRW 1,400 and has recently broken through KRW 1,470, prompting concerns that it could enter the KRW 1,500 range. The exchange rate indicates the relative value of a country's currency; a sustained weakening of the won suggests that, despite a current-account surplus, capital outflows are exceeding inflows on the capital account. This can be interpreted as the combined result of firms increasing their foreign-currency holdings and foreign capital withdrawing from Korea's equity and bond markets, and it reflects declining confidence among both domestic and international investors in Korea's financial markets and real economy.

Another factor undermining growth potential is the accumulation of the so-called three major debts: household, corporate, and government debt. Household debt is approaching KRW 2,000 trillion and is nearing 90% of GDP-a level higher than the average among advanced economies. Corporate debt also reaches about 120% of GDP. Government debt is about 50% of GDP, still relatively low compared with many advanced economies, but its rate of increase has been very rapid since the 2010s, and persistent deficit budgeting is expanding the burden on the future. This debt structure increases the overall economy's vulnerability to changes in interest rates and the business cycle. In addition, the world's fastest pace of low fertility and aging is reflected in realities such as a total fertility rate of 0.85 as of September 2025 and a population aged 65 and over exceeding 10 million as of 2024. This goes beyond the issue of population decline per se: it directly leads to rising welfare-finance burdens in pensions, health insurance, and long-term care, and it compounds multiple issues at once-including weakening growth potential, deepening government debt, and the need to restructure intergenerational taxation and transfer-income arrangements.

2. External Challenges

The external economic environment is also a key factor heightening uncertainty for the Korean economy. As global supply chains are reshaped after COVID-19, strategic competition between the United States and China has effectively entrenched a 'new Cold War' configuration and made geopolitical risk a constant. At the same time, the spread of protectionism and efforts by countries to strengthen industrial and technological sovereignty are shaking the foundations of the traditional free-trade system. U.S.-China friction has moved beyond a simple trade dispute and has become a prolonged contest for technological primacy over future economic leadership. What began as tariff conflict has now expanded into competition to form rival technology blocs centered on strategic industries such as AI, semiconductors, and batteries, thereby reshaping the global industrial structure itself. As a result, the conditions for economic cooperation are changing significantly. Departing from the previous free-trade order that prioritized efficiency, an economic-security paradigm that takes values, security, and alliances into account is emerging as a new standard for the world economy. The criteria for evaluating global supply chains are also shifting toward 'stability and strategic value,' and accordingly global firms are accelerating moves to reduce dependence on specific countries and regions and to diversify their supply chains. For Korea as well, the need to move away from a China-centered supply-chain structure and diversify markets, investment, and supply chains has become clearer than ever.

Pressures to respond to climate change and to transition energy systems have also emerged as important external variables facing the Korean economy. The 2050 carbon-neutrality goal has become an international obligation rather than a choice, and the tightening of environmental regulations-led by the EU and the United States-is creating new trade barriers such as the Carbon Border Adjustment Mechanism (CBAM), supply-chain due diligence laws, and mandates to shift to renewable energy. This presents a clear challenge to Korean firms that have grown around energy-intensive industries. Costs to respond to ESG and carbon-neutrality policies are rising rapidly, and investment to decarbonize production processes and secure the sustainability of management is unavoidable. At the same time, building the technologies and infrastructure required for low-carbon sectors-such as electric vehicles, a hydrogen economy, and renewable energy-involves substantial upfront investment.

3. Strategies to Turn Challenges into Opportunities

To turn the complex crises facing the Korean economy into opportunities, a shift away from traditional economic-development paradigms is required. A strategic transformation is essential-one that comprehensively renews national capabilities through innovation in the industrial structure; diversification of supply chains; improvements in demographic and labor productivity; sustainable management of public finances and debt; acceleration of the green transition; and strengthened trade and economic-security capacity.

First, the core of addressing near-term issues is stabilizing the real estate, foreign-exchange, and stock markets. Recently, the strengthening of protectionism under the Trump administration in the United States has supported a stronger U.S. dollar in global financial markets, increasing exchange-rate volatility at home. Meanwhile, sharp fluctuations in the stock market have widened the disconnect from the real economy, and lately there are signs that investor sentiment is weakening. Therefore, to ensure that corporate value is appropriately reflected, measures are needed to enhance transparency, improve corporate governance, and expand the foundation for long-term investment. In addition, stringent real estate regulations are amplifying market anxiety, and the combination of lending restrictions with policies to lower interest rates for low-credit borrowers has produced capital-market distortions, including rising market rates and rate reversals. Amid these compounded factors, the real estate market is showing high volatility as it is influenced by interest-rate changes, supply uncertainty, and a slowing economy, which in turn leads to rising household debt, heavier repayment burdens, and risks to the financial system. Accordingly, stabilizing the real estate market requires restoring balance between demand and supply, a more sophisticated financial-regulation framework, and a redesign of policies centered on end-users with genuine housing demand. Securing overall stability across foreign-exchange, capital, and real estate markets is a prerequisite for structural transformation.

Second, the increasingly intensified green protectionism centered on carbon reduction and energy transition should be turned from a challenge into an opportunity. For firms leading the eco-friendly transition, international environmental regulations can instead become a foundation for new competitive advantages. In particular, areas such as batteries, hydrogen, eco-friendly materials, and energy-efficiency technologies are fields in which Korea already possesses global competitiveness; the stronger global regulations become, the greater the opportunity for Korean firms to lead technical standards and shape market order. Stricter climate and environmental regulations demand new costs from the Korean economy, but they are also an important signal indicating the direction of future industries. It is especially important to secure the capacity for technological innovation that maintains competitiveness in energy-intensive industries while pursuing an environmentally friendly transition. Execution capability-to build an 'ultra-gap' in batteries, the hydrogen economy, renewable energy, and carbon-reduction technologies, and to redesign the industrial structure in an eco-friendly direction-will be a key variable determining the global standing of Korean industry going forward. Ultimately, the question is one of speed and approach: whether to follow regulations passively, or to seize opportunities proactively through innovation and preemptive investment, will determine the future competitiveness of Korean firms.

Third, the Korean economy must now move away from debt-centered growth and transition to a market-centered, advanced-economy paradigm of development. Korea succeeded in industrialization through government-led and debt-led strategies while rising from a low-income country to an advanced economy. However, now that it has already entered the advanced-economy stage, such developing-country-style strategies are no longer valid. At a time when the competitiveness and innovative capacity of the private sector outpace those of the public sector, it is preferable to resolve corporate and industrial restructuring or problems of household and self-employed distress not by adding more debt, but through the market's adjustment function. Income declines and poverty risks for vulnerable groups that arise in that process should be supported through targeted welfare policies. On institutional issues as well-such as debates over labor-market flexibility, the so-called 'Yellow Envelope Act,' and revisions to the Commercial Act-the government should present broad institutional directions rather than intervening directly in detailed domains, and should allow firms, labor, and industrial actors on the ground to coordinate concrete adjustments on their own. This is directly linked to building inclusive political and economic institutions for sustainable economic development.

Korea is no longer a developing country that merely follows global trends; it has reached a stage of economic development where it can stand shoulder to shoulder with advanced economies. Not only in traditional industries such as automobiles and shipbuilding, but also in future industries such as semiconductors, electronics, and AI, Korea has demonstrated world-leading competitiveness and has positioned itself as a key player in the era of the Fourth Industrial Revolution. If Korea responds proactively to changes in the global order on the basis of this industrial competitiveness, it will be able to create new growth opportunities even amid the current complex crisis.

Note: The views expressed herein may differ from those of the Hansun Foundation.

(※ It's a translation based on machine translation)