If one looks only at the ‘growth rate numbers’, the Korean economy in the new year does not look bad. Growth projections in the 1.82% range are higher than last year. However, a low potential growth rate of 2%, industrial hollowing-out, and polarization by class are holding the Korean economy back in the new year. Although the Korea·U.S. tariff negotiations have been concluded, concerns are growing that what lies ahead is more problematic. To take stock of the direction of the Korean economy in the new year, the Kyunghyang Shinmun is running three interviews on the economy and industry.

Lee Geun, President of the Korean Economic Association (Distinguished Professor in the Department of Economics at Chung-Ang University and Professor Emeritus at Seoul National University), said, “(After the Korea·U.S. tariff negotiations) U.S.-driven·China-driven·domestically driven triple deindustrialization has already begun,” adding, “The content of growth matters more than maintaining growth itself. The problem is that growth, no matter how much, is producing worsening distribution.”

In an interview that lasted more than an hour with the Kyunghyang Shinmun in his Chung-Ang University office in Dongjak-gu, Seoul, on the 26th of last month, Professor Lee cited ‘deindustrialization’ and ‘polarization’ as urgent tasks for the Korean economy in the new year, diagnosing that the Korean economy is at a structural crossroads rather than in a mere cyclical slowdown. He emphasized, “Even if we build factories in the United States, we must at least design them to use Korean materials, parts, and equipment.”

Professor Lee is a global expert in the economics of innovation. For his book <A Schumpeterian Analysis of Economic Catch-up>, which studied ‘catch-up and leapfrogging’, a development strategy for late-emerging economies, he became in 2014 the first scholar from the non-Western world to receive the Schumpeter Prize. Korea, once among the poorest countries, initially imitated advanced economies (catch-up), but later was able to leap to advanced-economy status by innovating beyond other advanced economies (leapfrogging). If the co-laureates of the Nobel Prize in Economics last year (Professors Joel Mokyr·Philippe Aghion·Peter Howitt) emphasized “technological innovation” to overcome low growth, Professor Lee pointed out that “after growth, the crucial issue is worsening distribution.”

From that perspective, Professor Lee warned that while the Lee Jae Myung administration has expansionary fiscal policy and is increasing investment in artificial intelligence (AI) that can, for now, prime a recovery, “Korea is converging toward Anglo-American capitalism summarized by ‘low growth·bad distribution.’”

He then proposed for the direction of the Korean economy “a shift from low-burden·low-welfare to medium-burden·medium-welfare.” He argued that the expansionary fiscal stance to ease polarization should be maintained, but that, over the long term, sustainability must be secured through tax increases. Professor Lee also argued, “At the beginning of the term, the financial investment income tax should have been introduced.” The following is a Q&A.

- What is your outlook for the Korean economy in the new year?

“In terms that growth will move from around 1% in 2025 to 1.82% in 2026, there is recovery. It is positive that tariff uncertainty has been removed. However, one must consider the base effect from the very low growth last year. 2% growth is only reaching the level of the potential growth rate. Because the government is pursuing expansionary fiscal policy, it is almost the maximum that can be achieved.”

- What are the reasons for the decline in the potential growth rate?

“Because labor and capital equipment are not being utilized at 100%. Since it is not easy to raise utilization of labor and capital through straightforward measures, the government appears to be trying to raise productivity through AI investment. If AI-related investment succeeds, growth effects can be achieved without increasing labor input.”

- The government is emphasizing ‘AI’ investment.

“In a situation where low growth has become entrenched, what can be done is AI investment. The long-term direction of combining physical AI with Korean manufacturing is fine. In the short term, fiscal injections by the government will serve as a pump primer for growth.”

- How do you assess the Korea·U.S. tariff negotiations?

“It is positive in that uncertainty has been resolved, but a 50% tariff on steel and the pledge to invest $350 billion could become burdensome.”

- How serious is the concern about deindustrialization?

“Korea is experiencing triple deindustrializationU.S.-driven, China-driven, and domestically driven. First, U.S.-driven deindustrialization: because of the tariff policy of the Donald Trump administration, companies are entering the United States. Second, China-driven deindustrialization: as the United States curbs China, China is diverting exports it cannot ship to the United States to neighboring countries, and exports from Korea are affected. Low-price offensives from China are weakening the bases of the steel and petrochemical industries. Lastly, there is domestic deindustrialization caused by low birthrates and population aging. Domestic demand is depressed, and regios have been hollowed out. Companies taking capital abroad is domestically driven ‘financial hollowing-out.’”

- What impact will deindustrialization have on the domestic economy?

“It will resemble the Rust Belt (a declined industrial region) in the United States. Factories are already shutting down. China-driven deindustrialization and U.S.-driven deindustrialization have different patterns. Up to now, Korean investment in China·Southeast Asia has not undermined domestic employment and has maintained a complementary relationship with domestic industry. In contrast, direct investment in the United States has limited effects on domestic employment.”

- Is there anything we can do now in response?

“Even if we build factories in the United States, we must at least design a structure that uses Korean materials, parts, and equipment. Because it is difficult for the United States to rapidly build a supply-chain ecosystem, if a structure in which Korea supplies materials, parts, and equipment is maintained and domestic manufacturing continues to grow, domestic jobs will increase. For China-driven deindustrialization, one can consider non-tariff barriers such as anti-dumping duties, corporate subsidies, and environmental regulations.”

- What should be the top priority for economic policy in 2026?

“In a survey responded to by 200 members of the Korean Economic Association in May 2025 that asked about the balance between growth and distribution as policy goals of the current administration, 80.5% of responses favored placing greater emphasis on growth. It is understandable that the current administration, in the New Year address and elsewhere, is showing a stance that values growth. However, the widening disjunction between growth and distribution is the problem. Growth, in principle, requires giving firms as much autonomy as possible, whereas the role of government is, in principle, to enhance the redistribution function.”

- So reducing polarization is more important than growth?

“The content of growth matters more than growth per se. No matter how much growth there is, it is a problem if it generates worsening distribution. The growth rate of the United States is solid, but the real wages of the American middle class have barely increased. Korea is moving toward that pattern. The solution is to move from low-burden·low-welfare to medium-burden·medium-welfare. Otherwise, Anglo-American capitalism summarized by ‘low growth·bad distribution’ could become entrenched.”

- Ultimately, is it a tax issue?

“Korea is among the countries where redistribution through taxation is smallest. Therefore, the traditional redistributive function of taxation must be strengthened. When Professor James Robinson of the University of Chicago visited on the 23rd of last month, he said, ‘Korea has an advanced-economy·European structure, but the share of government in the Korean economy is as low as in Latin America.’ That is, Korea is a small government. In Korea, the tax burden ratio last year was 18.6%, very low among Organisation for Economic Co-operation and Development (OECD) members (2023 average 25.4%).”

- The previous administration cut taxes, and the current administration is focusing on expanding fiscal spending.

“Whether progressive or conservative, past administrations (the Park Geun-Hye and Moon Jae-In administrations) gradually raised the tax burden ratio, but the Yoon Suk-Yeol administration lowered it sharply, making it harder to raise again. Because there is tax resistance, the current administration is only ‘pretending’ to restore it and has not reversed the previous administration tax cuts. If the Yoon Suk-Yeol administration increased national debt through tax cuts, the current administration, by increasing spending without broadening the tax base, has fallen into a ‘fiscal trilemma.’ A high level of welfare, a low tax burden, and low national debt cannot be achieved simultaneously. Korea used to be in a state of low burden·low welfare·low debt, but now rising welfare demand is being covered by national debt.”

- Are tax increases necessary?

“Yes. Japan issues a key currency, so it can increase debt to some extent, but Korea has a smaller economy, so if national debt increases, the national credit rating could fall or government bond interest rates could rise, becoming more dangerous over the long term. The current administration should have pursued tax reform, but because of tax resistance, the tax package in the first year ended up fizzling out. It failed to properly undo the tax cuts of the previous administration and backtracked. It also failed to restore the sharply reduced real estate tax regime under the previous administration.”

- In fact, even the financial investment income tax has not been introduced.

“It should have been introduced at the beginning of the term. According to an internal survey by the Korean Economic Association, 80% of economists supported introducing it. Although the parties agreed on the tax, it was scrapped on the grounds that market conditions were poor. Even though the market has improved now, it still has not been introduced. To make up for insufficient tax revenue, the securities transaction tax was raised slightly, but that is not the straightforward solution.”

- High exchange rates at year-end and the New Year became controversial.

“This is not a liquidity crisis due to a shortage of dollars as in past currency crises. It is a supply-demand issue. Overseas investment by retail investors·overseas investment by the National Pension Service, dollar holdings by exporters, the Korea·U.S. interest-rate differential, and differences in Korea·U.S. economic fundamentals (underlying strength) have all interacted. The biggest problem with a rising exchange rate is that it pushes up prices. Because there are special factors with the exchange rate, the government must manage it. If the Korea·U.S. interest-rate differential narrows further, semiconductor exports increase, and the government and the foreign-exchange authorities mobilize various tools, I do not think the won·dollar exchange rate will exceed 1,500 won in the new year.”

- What is the outlook for domestic demand this year?

“Domestic demand is always weak, but recently tourism has perked up, and it is a small consolation that levels have returned to those before COVID-19. The key to domestic demand is prices, and if the exchange rate jumps and pushes up prices, demand can slump. If the exchange-rate issue is not addressed, domestic demand could be difficult.”

- Real estate price surges are also a major problem. Are there solutions?

“The deep cuts to real estate taxes under the previous administration are one factor triggering the current upward trend in real estate prices. The comprehensive real estate tax was raised under the Moon Jae-In administration and did have aspects that distorted the market, but the market had to some extent adapted and reached a kind of equilibrium, which the Yoon Suk-Yeol administration broke. Keeping the policy rate low was also a factor. The current administration did well to tighten foreign real estate investment. Going further, rather than restricting purchases, the acquisition tax on foreigners should be raised. Singapore set the real estate acquisition tax for foreigners at 30%, and since investment by Chinese and others continued, raised it to 60%.”

- The KOSPI index has surpassed 4,000. What is your outlook?

“The real economy and finance have diverged. The real economy is weak, but the stock market has risen. Growth in Korea last year was 1%, half that of the United States, yet the KOSPI surged by 75.63% (year to date), among the highest in the world. Although the economic fundamentals of Korea were not very strong, stock prices rose because the current administration carried out a Commercial Act amendment for corporate governance improvement. In terms of liquidity, as U.S. rate cuts are expected, many foreign investors flowed in. There may be little room for further improvement in the new year, but we need to watch whether foreign-investor factors persist. It could vary depending on expectations for U.S. rate cuts.”