The South Korean Economy During Yoon Suk-yeol’s First Year

South Korean President Yoon Suk-yeol came into office in May 2022 with the objective of focusing the South Korean economy on private sector-led growth, in contrast to his predecessor’s income-led growth strategy. However, South Korea has faced a series of external shocks during Yoon’s first year in office. 

The new government held ambitions to reduce regulation and cut business taxes, but also to reduce South Korea’s debt to GDP ratio. Under Moon Jae-in, Yoon’s predecessor, South Korean debt grew from 36.3 percent of GDP when he entered office in 2017 to 50 percent by the time he left office last year. While this was a significant increase in debt, much of it was pandemic-related as debt began to take off in 2020. 

The first Yoon budget cut overall spending by 6 percent, representing the first annual decline since 2010. If there are no supplementary budgets, South Korean government spending would grow by its slowest amount since 2017. The Yoon administration achieved these cuts by scaling back some pandemic spending, such as aid to small- and medium-sized enterprises (SMEs) and cutting spending on infrastructure and in other areas. If successful, South Korea’s debt-to-GDP ratio would drop to just below 50 percent. 

The Yoon administration has also prioritized labor market reforms. Under the Moon administration, the maximum working hours were cut from 68 to 52 per week. The Yoon administration put forward a proposal that would have allowed flexibility for overtime, allowing maximum hours worked to reach 69 some weeks. However, after facing public pushback, the administration is now considering reforms that would keep working hours below 60 a week.

The South Korean economy has also faced external challenges from inflation, Russia’s invasion of Ukraine, China’s extended lockdowns due to the pandemic, and policy shifts in the United States. When Yoon entered office, inflation was 5.4 percent. It would peak in July 2022 at 6.2 percent, but still remains over 4 percent a year into Yoon’s term. 

Russia’s war has caused inflation in the South Korean economy. Prior to the war, South Korea imported a significant amount of petroleum, natural gas, and coal from Russia. However, South Korea’s energy imports from Russia cratered after the war and amid sanctions on Moscow: imports of crude petroleum declined by 60.3 percent, refined petroleum by 72.9 percent, and liquefied natural gas by 31.6 percent in 2022 (imports of coal grew). Yet the overall cost of South Korean energy imports increased by 58.9 percent despite the volume of South Korean fossil fuel imports only increasing 3 percent.

The increasing price of energy filtered through the domestic economy in the form of electricity price increases. Kepco, the state-owned energy monopoly, has increased electricity prices four times since the war began, with the most recent being a record 9.5 percent increase at the beginning of 2023. 

China’s continued lockdowns also held back the South Korean economy, with exports declining 4.4 percent for the year. 

Furthermore, two U.S. laws – the Inflation Reduction Act and the CHIPS and Sciences Act – also raised concerns for Korean policymakers and business. The Inflation Reduction Act became a major sticking point in South Korea-U.S. relations in the fall of 2022 because the act’s provisions required electric vehicles (EVs) to be assembled in the United States, Mexico, or Canada to be eligible for the bill’s $7,500 tax credit. While Hyundai and Kia had recently pledged to build a new EV production facility in Georgia, it will not begin production until 2025. Outside of the luxury Genesis GV70, no other Hyundai or Kia EV would be able to qualify until 2025, placing them at a competitive disadvantage.

The CHIPS Act and its guidelines raised concerns for South Korea’s semiconductor industry. In addition to supporting investment in semiconductor production in the United States, the bill in combination with U.S. export controls is also designed to slow the development of China’s semiconductor industry. However, both Samsung and SK Hynix have significant semiconductor investments in China. Samsung produces 40 percent of its NAND memory chips in China, while SK Hynix produces 50 percent of its DRAM chips and about 30 percent of its NAND chips in China. 

While the guidelines for the CHIPS Act have created some space to expand South Korean semiconductor facilities in China, the act has also raises concerns about their long-term viability.

To address these trends in U.S. policy, the Yoon administration has engaged the Biden administration, but it has also turned to industrial policy to protect the long-term viability of South Korean industry.

In the area of semiconductors, the National Assembly has passed and amended legislation referred to as the K-CHIPS Act. The amended version of the K-CHIPS Act will provide large firms with a 15 percent facilities investment tax credit and up to 25 percent for small firms. It also provides generous tax incentives for semiconductor R&D, with large firms eligible for 30-40 percent tax breaks on R&D and small firms 50 percent. 

The Yoon administration is working with Samsung to create the world’s largest semiconductor cluster. Under the plan Samsung would build five advanced semiconductor facilities and 150 other facilities by 2042. 

South Korea is also taking steps to protect its EV and EV battery producers. South Korea formed an alliance with its battery makers in the fall of 2022 with the goal of gaining 30 percent of the global EV battery market by 2030. Since the announcement of the alliance, the government has announced $5.3 billion in support for battery makers to improve competitiveness and invest in the United States. The South Korean government and EV battery producers also plan to invest $15.1 billion through 2030 to develop advanced battery technologies, including solid state batteries.   

Yoon has also indicated that he would like to see the domestic production capacity for EVs increase fivefold by 2030 and will seek to provide the tax and regulatory support needed to reach that goal. 

In his first year in office, Yoon has faced a series of external challenges from the lingering effects of COVID-19 in China to Russia’s invasion of Ukraine to U.S. industrial policy. Despite coming to office pledging to support private sector-led growth, he has instead turned to industrial policy to protect South Korea’s long-term interests in key sectors such as semiconductors, EVs, and EV batteries. While this policy shift has been necessary in the short term, if Yoon is to achieve his long-term goal of giving the market a larger say in the Korean economy he will likely also need a more favorable external environment.