BOK's Shin Says AI Investment Boom Should Help Korea Prepare for Demographic Shift

Bank of Korea Governor Shin Hyun-song said the investment boom driven by semiconductors and artificial intelligence should be used to prepare for demographic change.

Speaking in opening remarks at a conference on September 2 jointly hosted by the Bank of Korea, the Centre for Economic Policy Research and the Organization for Economic Co-operation and Development, Shin said South Korea is benefiting from an unprecedented investment wave led by semiconductor production and AI. “This is not the time to delay, but the time to prepare,” he said.

Shin called demographic change one of the most important long-term challenges facing central banks because it helps determine productivity, potential growth and the long-run neutral interest rate.

“What is happening in Korea today would not be an exaggeration to describe as a preview of what many other countries will soon face,” he said. “Demographics are a powerful force, but as the saying goes, demography is not destiny.” He added that history shows productivity and long-term growth are heavily shaped by the creation and spread of knowledge, and that AI makes those questions more pressing than ever.

He also stressed that, unlike short-term shocks, demographic change can be forecast decades in advance. While the challenge is formidable, that also means countries can prepare before it is too late, he said, adding that now is the right time to respond as South Korea sits at the center of the AI ecosystem.

A study presented at the conference also drew attention for arguing that South Korea’s intense private education spending is dragging down the birthrate. Kim Sung-eun, an economics professor at Sejong University, and other researchers described parents’ tendency to compare their children’s academic performance with that of others and raise spending competitively as “status competition,” and analyzed its effects on private education spending and childbirth. Countries with fierce education competition, including South Korea, Singapore and Chile, tended to have lower birthrates and faster declines.

In South Korea, lower-income households were found to spend a larger share of income on private education than higher-income families. Households in the bottom income quintile spent 8.4% of their income on private education, compared with 5.1% for those in the top quintile.

The study also found spillover effects from private education spending by higher-income households. If the top 15% of households cut such spending by 10%, the share of private education spending among the bottom 50% of households would fall by 0.4 to 0.9 percentage point from an average of 6%.

The researchers estimated that without the effects of status competition, women born between 1970 and 1975 would have had an average of 2.45 children, 28% more than the actual 1.92. Kim said policies that ease such competition could improve both fertility and welfare without adding to the fiscal burden because status competition leads to socially excessive education spending and low fertility.

Fumio Hayashi, professor emeritus at the National Graduate Institute for Policy Studies in Japan, identified population aging as the root cause of Japan’s three decades of stagnation. He said Japan’s prolonged slump was due in large part to population aging that began earlier than in other countries, and similar slowdowns could be repeated in East Asian economies including South Korea, China and Taiwan. He also projected that South Korea’s pace of aging from 2020 to 2025 would be the second-fastest after Hong Kong.

Shim Sung-mi, Korea Economic Daily reporter smshim@hankyung.com