Executive Summary

As a result of the global COVID-19 outbreak, South Korea has experienced the steepest decline in GDP since 1998, with its economy shrinking by 3.3% between April and June 2020. The country, which is the fourth largest economy in Asia, relies heavily on exports which account for approximately 40% of its GDP. Declining economy has continued to cut-off jobs, with the country experiencing the highest unemployment rates in a decade. The impact of COVID-19 on Korean economy has been analyzed using the Keynesian and the AS-AD models. Compared to its OECD counterparts, South Korea can be considered to having implemented a more liberal approach of containing the virus. The primary fiscal policy intervention adopted by the country was in the form of supplementary budgets. Similarly, the country through national bank, Bank of Korea (BOK), has put in place different monetary and macro-financial policies to ensure the country’s sustained financial system liquidity and accommodative monetary conditions. Despite the efforts undertaken by the South Korean government to address COVID-19, the country is still faced with numerous overreaching, long-term challenges that are fast amplifying



The Great Lockdown: Macroeconomic Impact Report on South Korea

South Korea, Asia’s fourth largest economy, experienced the steepest decline in its gross domestic product (GDP) since 1998 as a result of the COVID-19 outbreak. The pandemic is the world’s global crisis with most immediate and heaviest impact on people’s lives since the World War II. Although the societal as well as the economic impacts are sometimes hard to quantify, they are in all aspects massive. South Korea is often considered as a country that experienced a high level of success with regard to implementing measures to contain the outbreak

The Impacts of the COVID-19 Shocks in South Korea

When compared to countries such as the United States, China, and Europe, South Korea is definitely an icon of success as far as the response to the novel coronavirus is concerned. However, despite the success, the country still experienced the worst economic contraction since the 1998 Asian financial crisis, with quarter-on-quarter GDP declining of 1.3% in the first quarter of 2020 (Stangarone, 2020).  However, compared to other Organization for Economic Co-operation and Development (OECD), which recorded a 6-8% economic contraction, South Korea’s path seems a bit successful.

South Korea’s heavily relies on exports which account for approximately 40% of the economy. As a result of the COVID-19 outbreak, the country fell into recession during the second quarter, with GDP shrinking by 3.3% between April and June 2020 (Jeong & Jun, 2020). The decline in South Korea’s GDP is majorly attributed to weak demand for the country’s exports (Austermann et al., 2020). In the second quarter of 2020, exports fell by 16.6%, the largest decline since 1963. Falling exports had huge impacts on manufacturing, which declined by 31.5% on adjusted annual rates (Stangarone, 2020). For the full year, it is expected that South Korea’s GDP will decline by more than 2%, according to the Bank of Korea. However, OECD estimates that the economy may fall by 2.5%.

Declining economy has continued to cut-off jobs, with the country experiencing the highest unemployment rates in a decade. The government has provided unemployment benefits to its citizens in a bid to protect them from the adverse effects of job losses (Wallheimer, 2020). As a result of travel restrictions imposed as a measure of combating further spread of the virus, the service sectors such a travel, hospitality, and tourism industries were the worst hit. According to Stangarone (2020), 133,000 jobs were shed in the food industry. Similarly, the travel industry lost 60,000 while the wholesale and retail sectors shed-off 57,000 jobs (Stangarone, 2020). Although domestic tourism is slowly starting to pick, international tourists have not returned. Considering the fact that tourism accounts for approximately 4.2% of the country’s GDP, the country is expected to continue feeling the impact of declining economy up macroeconomic to the 3rd and 4th quarter.

The macroeconomic impact of COVID-19 on South Korean economy can be look at using the new Keynesian Model as well as the AS-AD model. Both reduction in demand and supply lowers the real GDP. In the traditional Keynesian model, output and employment are determined by aggregate demand (AD).  Consequently, AD depends positively on productivity growth. For policy makers, separating supply constraints from demand shortfalls is an important endeavor since the two require different interventions. Most recessions are broad since all sectors tend to reduce their output simultaneously. The AS-AD model aggregates all sectors into one. Looking at the effect of the COVID-19 on South Korea’s aggregate demand, there arises a positive relationship between productivity (g) on the Y-axis and employment (l) on the X-axis as illustrated in Figure 1 below.

Figure 1: relationship between productivity and employment before the COVID-19 pandemic (Source: Author)

Assuming the country was initially at full employment point before the pandemic, then the COVID-19 pandemic is expected to cause a persistent decline in productivity growth from g to g1 as indicated in the figure 2 below. The result is lower demand for the country’s product and emergence of involuntary unemployment. From the Keynesian model standpoint, it can be deduced that coronavirus pandemic, through its adverse effects on expectations on future productivity, a demand-driven recession might be induced as seen in the case of South Korea.

Figure 2: relationship between productivity and employment after the COVID-19 pandemic (Source: Author)

The macroeconomic effect of the novel coronavirus pandemic in South Korea can easily be compared to the shocks caused by the Asian financial crisis in 1997-98. During this time, five Asian countries, Indonesia, the Philippines, Thailand, Malaysia, and South Korea experienced banking and currency Crisis. The crisis was responsible for significant macroeconomic effects including sharp declines in stock markets and currency values (McKibbin &Fernando, 2020). The Seoul stock exchange fell by 7% in 1997. Similarly, the country’s GDP fell by 33.1%, representing a $170.9 billion fall in 1998 as compared to 1997’s GDP (McKibbin &Fernando, 2020). As a result of many businesses collapsing, millions of people in South Korea were thrown below the poverty line. The macroeconomic level-effects of the COVID-19 pandemic are closely related to those of the Asian financial crisis.



Policy Responses to COVID-19 in South Korea

South Korea recorded its first coronavirus case in late January 2020. With a daily average of over 500 cases in early March, the country had the highest number of COVID-19 cases outside china (You, 2020). However, the country slowed the spread of the disease in relatively short period of time.  The authorities implemented comprehensive tracking and testing mechanisms which made early isolation and treatment possible. These measures saw the daily average slow down to just less than 100 cases from April-July 2020 (IMF, 2020). Compared to its OECD counterparts, South Korea can be considered to having implemented a more liberal approach to containing the virus. The country’s response to COVID-19 has been marked by a voluntary and flexible refusal to impose total lockdowns and border closure.  To a large extend, this approach has had significant economic benefits, making South Korea the least hit among the OECD members (Oh et al., 2020). As of October 2020, South Korea has implemented numerous fiscal and monetary policy actions geared towards helping the country cushion itself against the COVID-19 pandemic.

The primary fiscal policy intervention adopted by the country was in the form of supplementary budgets. As of October 2020, South Korea had passed four supplementary budgets. On 17th March, the 1st supplementary budget was passed by the Korean National Assembly (IMF, 2020). The budget included a revenue decline by KRW 0.8 trillion as well as an additional KRW 10.9 trillion expenditure on loans and guarantees for affected businesses, disease prevention and treatment, support for local economics, and supporting affected households. The second supplementary budget, which was passed on 30th April 2020, increased spending by KRW 8 trillion intended to fund emergency relief payment program that would provide transfer to households (IMF, 2020). South Korea spent a total of KRW 6.3 trillion in its 3rd supplementary budget. On 22nd September, the country’s National Assembly passed the 4th supplementary budget where an additional KRW 7.8 trillion would be used to support small businesses, employment support, daycare support, and low income households. Increased government spending through the supplementary budgets is likely to cause a rise in the country’s aggregate demand (AD) (Larsen, 2020).  In the short term, this is expected to lead to higher growth in the economy as shown in figure 3 below.

Figure 3: Macroeconomic impact of South Korea’s fiscal policy. (Source: Author)

The government announced a ‘Korea New Deal’ that was aimed at transforming the economy to a digital leader and green economy. The package included three major packages; digital economy, social safety net, and green technology. KRW 50 billion has been set aside for building of 5G network infrastructure as well as cloud computing. Further, KRW 660 billion seeks to promote the industrial convergence between artificial intelligence (AI) and 5G Network (New Zealand Ministry of Foreign Affairs and Trade, 2020). The new policy seeks to create a total of 1.9 million jobs, an economic intervention that will see the country recover from the massive job losses sustained as a result of the COVID-19 pandemic.

The Korean government has also implemented a number of monetary and macro-financial policies aimed at addressing the economic challenges created by the COVID-19 pandemic. For instance, the Bank of Korea (BOK) has put in place different measures to ensure the country’s sustained financial system liquidity and accommodative monetary conditions. Key among these policies include expanding the list of open market operations (OMOs), lowering base rate from 1.25% to 0.5%, easing collateral requirements, making funds available through the OMOs, and purchasing Korean treasury bonds (IMF, 2020). Aware of the fact that the small and medium enterprises (SMEs) contribute immensely towards the country’s GDP, the BOK increased lending support facility by KRW 18 trillion. Measures intended to boost SMEs will have an impact of increasing productivity which in turn increased employment levels and ultimately the overall GDP of the country.

South Korea also implemented measures to support exporters and specific industries. On 8th April 2020 a package worth KRW 36 trillion was announced as a way of easing constraints for exporters. Similarly, Korean President Moon announced an industry stabilization fund that would be funded by KRW 40 trillion to support industries that had been mostly affected by the COVID-19 outbreak (IMF, 2020). Key industries that would receive this financial support included communication, general machinery, autos, airlines, shipping, shipbuilding, and electric power. Support provided through loans, investments, and payment guarantees would have the impact of increased expenditure which in turn will increase overall GDP through increased aggregate demand (AD). To cushion against negative impacts of government expenditure such as inflation, the Korean government seeks to raise funds through contributions of private funds and government-guaranteed bonds.

Despite the efforts undertaken by the South Korean government to address COVID-19 and its impact on the economy, some critics argue that the short-term funds for job creation may fail to address long-term structural issues. For instances, the issues of economic inequality, family-run businesses ‘chaebol’, and concentration of wealth are some key pertinent issues that still remain unresolved (Goto, 2020). Further, the liberal approach taken by the country in the way of deliberate decision not to close borders creates a chain of new cases that make it possible for a second wave of infections that may negatively impact on the steadily peaking economy.

Beyond the Pandemic

South Korea has performed well over the last few decades in a bid to catch up with its OECD counterparts as far as economic growth is concerned. However, the country is still faced with numerous overreaching, long-term challenges that are fast amplifying (Goto, 2020). For instance, the issues of aging population, low fertility rate, and socio-economic divide are some of the major structural challenges that the country has to deal with. According to Seo (2019), South Korea has posted some of the lowest fertility levels in the world for the past 10 years. The fall in birthrate is a serious challenge to South Korea.

In 2018 the fertility rate in the Republic of Korea fell below one (0.98) for the first time in history, indicating a decline of 7.1% compared to the fertility rate in 2017. According to the United Nations (UN) forecast, the country’s fertility rate will decrease to 0.86 by 2021 (Seo, 2019). After 2029, the South Korean population is expected to begin to decline. The failure to adequately address the issues of gender and income inequalities is significantly eroding people’s confidence in the future. As a result, many young people are opting not to get married or not to have children, a phenomenon negatively affecting the country’s population (Shin, 2020). To mitigate the negative effects of aging population, the country has adopted some measures that have seen South Korea spend about 80 trillion Won (Seo, 2019). Reduced population growth rate will have detrimental long-term effects on the economic landscape. For instance, aging population will result in reduced workforce, hence reduced productivity which might lead to overall reduction in the country’s GDP.




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