South Korea is experiencing rapid population ageing. Businesses will face skills shortages and increased costs of doing business. Consumer markets targeting young consumers will decline as older people become the main consumer group.
However, consumer businesses that can adapt to the changing consumer profile can benefit from the demographic change.
The ageing of South Korea’s population has accelerated in recent years:
- The number of people aged 65 and above reached 4.4 million in 2006, which made up 9.2% of the population, compared to 5.4% in Vietnam;
- The fertility rate, which represents the average numer of children born per woman, stood at 1.08 in 2005, down from 1.16 in 2004. This compares to Japan’s 1.26 figure in 2005, and their well-documented problem with ageing.
The ageing population will affect businesses since they face a declining work force. Consumer businesses, however, can benefit from this demographic change if they adapt to the changing consumer profile.
South Korea has experienced strong GDP growth rates which averaged 5.2% over 2000 to 2006 driven by strong exports of manufactured and IT products. However, the country faces difficulty in maintaining its labour force and sustainable economic growth:
- South Korea’s fertility rate is one of the lowest in the world. Many women are marrying later or choosing to be single to persue their career;
- The median age of South Koreans rose from 32.5 in 2001 to 35.2 in 2006 and is projected to be 39.5 by 2015. The ratio of over 65s in the economically active population to the total economically active population was 5.9% in 2006, compared to 1.7% in Taiwan.
Source: Euromonitor International from International Labour Organisation/national statistics.
The ageing population means there will be fewer people in the workforce to finance the rising number of pensioners:
- The number of pensioners in South Korea reached 6.0 million in 2006, an increase of 11.4% from 2001. During the same period, the number of economically active population grew by only 8.1%.
In general, it will be more difficult for businesses to get young workers. Consumer businesses will be confronted with changing consumption patterns as older people become the main consumer group.
The demographic shifts will have important implications for businesses, consumers as well as long-term growth in South Korea:
- South Korea could lose its competitiveness as the number of young workers in the labour force declines. Young people add innovation and know-how of advance technology, while older workers would need to be retrained. An ageing population can also lead to a lack of skilled workers. South Korea will lose its competitiveness against countries with growing populations in the region such as India or Vietnam. In 2006, foreign direct investment (FDI) inflows to South Korea declined to US$1.9 billion, down from US$7.2 billion in 2005 as there were delays in reforming the country’s investment environment. The country may experience slower growth in the future due to a declining workforce and the loss of competitiveness;
- There is a growing burden on the work force. The elderly dependency ratio, i.e. the proportion of the elderly population to the population of working age, is expected to jump to 69.4% in 2050 from 10% in 2000. This is the fastest growth rate in the world;
- With a rapidly ageing population and shrinking work force, tax revenues will decrease, while expenditure on pensions and health care will expand, undermining the country’s fiscal position. Government expenditure on health increased at an annual average rate of 8.2% over the period 2000-2006. While public social spending in South Korea is currently the lowest in the OECD (6.0% of GDP in 2001 according to OECD), it is forecast to increase to around the current OECD average of 21.0% by 2030. GDP per capita growth could therefore stagnate resulting in lower disposable incomes and consumption;
- Consumer markets will change as older people become a significant group of consumers. Medical and healthcare service providers can expect increasing demand from an ageing population. However, businesses offerring leisure, recreational products and durable goods will lose out as their target consumers tend to be younger. Businesses that adapt to this changing consumer market will be able to benefit from the ageing population.
South Korea’s economic growth will slow in 2007 to 4.4%, down from 5.0% in 2006. In order to tackle the problem of an ageing population and to ensure long-term economic growth, the government has introduced several policies:
- The government promised to increase its healthcare as well as drug and pharmaceuticals R&D expenditure. It hopes to make available suitable services for their ageing population;
- The government has proposed raising the retirement age to 60 by 2008, and then to 65 by 2033. On average, South Korean workers retire at 57. Under the new proposals, the country would remove barriers facing older workers seeking employment, and toughen laws against discrimination of older workers;
- In August 2006, the government announced the Vision 2030 plan on public spending. Government expenditure will be put on a restraint and government revenues will be boosted throuh tax reform. This would help achieve a balanced budget in the medium term, helping prepare for future spending pressure.
Additionally, the South Korean labour market has been characterised by a growing part-time and casual workforce over the past decade, which is being encouraged by government and business. This will enable elderly participation.