With the Korean economy driven into a "triple-high crisis" of high exchange rates, high interest rates, and high prices, the trend of rate hikes is becoming pronounced worldwide. The European Union (EU) and Japan raised their base rates by 0.25 percentage point each this month, and Bank of Korea Governor Hyun Song Shin has also signaled a rate hike. Rate hikes deal a direct blow to low-income groups suffering under household debt and to small businesses and the self-employed struggling with corporate loans. In an interview with Seoul Economic Daily on Tuesday, Kim Kwang-doo, chairman of the National Institute for Future Strategy, expressed concern. "The Bank of Korea's base rate hike will only generate side effects unless it is precisely coordinated with the government's fiscal, industrial, and labor policies," he said. "A base rate hike could instead further shrink the standing of vulnerable groups and small and mid-sized enterprises, amplifying polarization." Kim, who served as vice chairman of the National Economic Advisory Council under the Moon Jae-in administration, cited youth unemployment as the most vulnerable Achilles' heel of the Korean economy. "The continued plunge in the youth employment rate is evidence that the foundation for future growth is collapsing," he pointed out. He stressed, "Union-biased policies that only further strengthen vested interests, such as the Yellow Envelope Act, the 52-hour workweek, and uniform extension of the retirement age, must quickly change direction."
- The "triple-high phenomenon" of high exchange rates, high interest rates, and high prices is unsettling.
△ Kim Yong-beom, the presidential chief of staff for policy, referred to the triple-high crisis as an "unavoidable cost of success," but that is a mistaken perception. The high exchange rate, which has exceeded 1,500 won per dollar, is the result of overlapping structural factors: foreign selling in the stock market, the preference of "Seohak ants" (Korean retail investors in U.S. stocks) for American shares, the investment agreement with the U.S., and dollar holdings by exporters. The problem is that as the high exchange rate becomes entrenched, it could aggravate price increases and shrink consumption, putting further pressure on the livelihood economy. In particular, under the Korea-U.S. investment agreement, Korea must invest 20 billion dollars annually until 2029 and also purchase 100 billion dollars' worth of liquefied natural gas (LNG) over four years. This is a structure in which about 45 billion dollars flow out to the U.S. each year. That is why the government needs sophisticated exchange-rate measures.
- Major countries are raising their base rates one after another.
△ The EU and Japan's central bank each raised their base rates by 0.25 percentage point this month, and the U.S. Federal Reserve (Fed) has also signaled a rate hike this year. Bank of Korea Governor Hyun Song Shin also stated, "We need to raise rates without delay, focusing on price stability." But if the Bank of Korea's monetary policy is operated individually without being linked to the government's fiscal policy or industrial and labor policies, the side effects will outweigh the benefits.
- Are you saying the "dual polarization" of households and businesses could worsen?
△ Yes. As of the first quarter of this year, household credit stood at a record-high 1,993 trillion won. In particular, the number of vulnerable borrowers among households and self-employed borrowers reached 1.82 million, and the loans they hold exceeded 230 trillion won. Vulnerable borrowers' debt accounts for 11.5 percent of total household debt. If the base rate is raised without buffers, these people will be the first to take the hit. Moreover, in a situation where the bottom 60 percent of income earners account for half of all debt, a rate hike could lead directly to reduced consumption and a domestic demand slump. The base rate hike further deepens the divide of "income polarization" between high-income and low-income groups. The situation for companies is little different. The debt of so-called zombie companies, which cannot even pay interest with operating profit for three years or more, stands at around 340 trillion won (as of 2025). Some of these companies are highly likely to fail, unable to withstand the shock of a base rate hike.
- A policy clash between the government and the Bank of Korea is also a concern.
△ To respond to the triple highs, we must be wary of policy discord. The government takes the position that there is no need to repay debt as long as it is "spent well and productively," but the reality is otherwise. The share of welfare-related transfer spending is large, and supplementary budgets have already been implemented twice. Rather than focusing on a balanced budget, the stance is that if more tax revenue comes in from export booms such as semiconductors, more will be spent on welfare. In this situation, raising the base rate can only have limited effect. Furthermore, if rates rise, government bond yields rise along with them, increasing the interest burden the government must bear, creating a contradiction in which the fiscal deficit actually expands. Ultimately, monetary policy alone has its limits, and harmony with fiscal policy is needed.
- The government is confident about improving growth rates and economic recovery.
△ We must not be deceived by the economic indicators and figures that appear on the surface. The government, based on the Organization for Economic Cooperation and Development (OECD) forecast, mentions a nominal GDP growth rate of more than 10 percent this year, but considering the GDP deflator, a production price indicator, the real GDP growth rate is likely to remain at around 2 percent. It is an optical illusion that makes the nominal GDP growth rate appear to have risen as semiconductor export prices soared. The problem is that our economy's fundamental strength has fallen so much that the real growth rate falls below the potential growth rate (the maximum growth rate that does not induce inflation). We must not mistake or misread the KOSPI breaking through the 9,000 line as the true strength of our economy.
- There are loud voices of concern about lopsided growth driven by semiconductors.
△ The semiconductor super-boom that is currently driving our exports and growth is temporary and not sustainable. The surge in memory prices is largely attributable to a supply shortage as artificial intelligence (AI) and data center expansion proceed faster than expected. According to experts, there is also analysis that memory prices will stabilize around 2028. In particular, competitors such as Intel are developing technology to replace high-bandwidth memory (HBM), and China is preparing to increase the supply of legacy memory. The reality that, as of May, the semiconductor industry accounts for 42 percent of our exports and that Samsung Electronics and SK hynix make up 50 percent of the KOSPI's market capitalization cannot be considered normal. The government must hurry to prepare future growth engines that will be responsible for the "post-semiconductor" era.
- Demands for "N% performance bonuses" stemming from semiconductors are spreading.
△ The current criteria and form of performance bonus payments are deeply problematic. Operating profit is a resource for future investment, and using it for performance bonuses is not appropriate. One-time compensation is understandable, but institutionalizing it for 10 years is a dangerous idea. Existing shareholders and foreign investors are likely to oppose it. Another problem is that N% performance bonuses deepen income polarization between large companies and small and mid-sized enterprises and induce a sense of relative deprivation. Employment in industries where unions demand N% performance bonuses, such as semiconductors, automobiles, and shipbuilding, accounts for only 10 percent of the total. Small and tiny enterprises facing difficult management environments handle 90 percent of employment, and N% performance bonuses are merely "pie in the sky" for them.
- There are loud voices of concern about "compound polarization" of assets and income.
△ Resolving polarization is a long-standing task the government must place at the top of its priorities and solve. Income polarization goes beyond simply widening the wealth gap; it becomes a factor that accelerates social conflict and national division. In fact, the quintile ratio, which divides the disposable income of the top 20 percent of households by the income of the bottom 20 percent of households, reached 6.59 times in the first quarter of this year. This is the highest level since the first quarter of 2020 (6.89 times), when the COVID-19 shock began in earnest, meaning income distribution has worsened that much. The net-worth Gini coefficient, which indicates the degree of inequality, also soared to 0.625 last year, recording the highest since records began in 2012. While high-income groups see their wealth grow further amid the stock market boom and rising home prices, ordinary people and the young are driven into livelihood hardship and difficulty finding jobs, with the ladder of class mobility collapsing.
- Above all, the sighs of the young run deep.
△ What future is there for a nation where the young, who should be working vigorously, have lost their dreams? The May unemployment rate for the young (aged 15 to 29) was 7.2 percent, and the number of employed fell by 255,000 from a year earlier. This is the largest decline since January 2021 (-314,000), when COVID-19 had its impact. The youth employment rate fell back from 46.2 percent to 43.8 percent. Despite this, it is a serious problem that the ruling party and government and the two umbrella labor unions cling to labor policies biased toward vested-interest unions. The Yellow Envelope Act and the 52-hour workweek, which block youth employment, must be supplemented, and uniform extension of the retirement age is also difficult.
