[Kangkook Lee's column] To Avoid a Widening 'K-Shape' in the Korean Economy

Dr. Kangkook Lee is Professor of College of Economics at Ritsumeikan University in Japan and Affiliated Research Fellow at CUKPE

In my previous post, I wrote that the U.S. economy is taking on a "K-shape," but what about the Korean economy, the literal originator of the K? Looking solely at economic growth, the Korean economy in 2026 appears to be entering a boom phase thanks to a significant increase in manufacturing exports led by semiconductors. The economic growth rate is projected to rise significantly compared to last year, having overcome the shocks of U.S. tariff hikes and the U.S.-Iran war, and stock indices are soaring day after day. However, the recovery of domestic demand, including private consumption, and wage increases remain sluggish, and the widening gap in recent years is cause for concern. To avoid a K-shaped economic recovery, the Korean economy requires efforts from the government to redistribute income, including tax increases and the alleviation of disparities in the dual labor market.

The Korean economy heading toward a boom

First, let's look at economic growth. According to the Bank of Korea's preliminary  report on real GDP for the first quarter , the first quarter of 2026 recorded a quarterly growth rate of 1.7%, showing remarkable growth compared to -0.2% in the fourth quarter of 2025. Compared to the first quarter of 2025, this represents an economic growth rate of 3.6%. As shown in the figure below, on a quarter-on-quarter basis, private consumption increased by 0.5%, while corporate equipment investment surged by 4.8% and construction investment rose by 2.8%. Exports of goods increased by 5.6%, bringing net exports in the first quarter to 5.7% of GDP.

This high growth was driven by a significant increase in South Korea's exports, centered on the semiconductor industry, alongside the artificial intelligence (AI) boom. According to the government, South Korea's exports in the first quarter of 2026 reached $219.9 billion, surpassing Japan to rank fifth in the world. Exports rose by 37.8% compared to the same period last year, with semiconductors increasing by 139% to record $78.5 billion, while petroleum products rose by 14%, ships by 14%, wireless communication products by 40%, and cosmetics by 22%.

April exports also reached $85.9 billion, a 48% increase compared to the same month last year, driven by a 173% surge in semiconductor exports. The trade balance also recorded a surplus of $23.77 billion. This demonstrates that Korea’s strong manufacturing competitiveness, accumulated across various industrial sectors including semiconductors, shipbuilding, telecommunications, defense, biotechnology, and cosmetics, is yielding results in the global market. Looking at the contribution to GDP growth, net exports accounted for 1.1 percentage points of the 1.7% growth in the first quarter, which was significantly higher than the "domestic demand contribution" of 0.6 percentage points, which includes private consumption (0.2 percentage points) and fixed investment (0.8 percentage points). In particular, real gross domestic income, which reflects the actual purchasing power of the public, increased by 7.5% compared to the previous quarter as terms of trade improved due to a significant rise in export prices for key products such as semiconductors.

Against the backdrop of the political shocks of martial law and impeachment, the South Korean economy recorded a low annual growth rate of 1% in 2025 and a negative quarterly growth rate in the fourth quarter; however, this year, it has entered a boom phase led by exports. While the second quarter is likely to see lower growth than the first due to the base effect from the first quarter and concerns over inflation stemming from the U.S.-Iran war, South Korea's annual growth rate for 2026 is projected to rise. Last February, the forecast for the 2026 economic growth rate was raised to 2%, and as of the end of April , major overseas investment banks are forecasting an average growth rate of 2.4% for 2026, including JP Morgan's 3% projection. Furthermore, there are expectations that high growth could continue for the foreseeable future if the semiconductor industry, which historically exhibited significant cyclical characteristics, becomes a structural growth industry thanks to the AI ​​boom. Corporate operating profits have also risen rapidly due to the semiconductor industry's boom and increased exports. The operating profit of KOSPI-listed companies is projected to rise from approximately 271 trillion won in 2025 to approximately 779 trillion won in 2026. Against this backdrop, the KOSPI index surpassed 7,500 in early May, a figure more than three times higher than its 2025 low.

The flip side of the boom and the K-shaped gap

However, behind the boom, the dark side of the Korean economy persists. As the recovery of domestic demand remains sluggish, self-employed individuals are facing severe difficulties.  The number of business closures among the self-employed exceeded 1 million in 2024, and last year is projected to reach an all-time high. While the number of closures decreased from approximately 920,000 in 2021 to about 870,000 in 2023, it has continued to rise since then. The loan delinquency rate for the self-employed has also risen rapidly since 2022, and in particular, the delinquency rate for vulnerable self-employed individuals—those with principal and interest overdue for more than one month—exceeded 11% in 2025.

According to the Consumer Sentiment Index released by the Bank of Korea, the index for April 2026 stood at 99.2, down 7.8 points from the previous month. This indicator had plummeted due to political crises but recovered rapidly following the impeachment, reaching a high of 107 in March; however, it showed a downward trend in April. The business sentiment index for all industries stood at 94.9 in April 2026, an increase of 0.8 points from the previous month; however, it remains below 100, indicating a somewhat more pessimistic outlook compared to the long-term average. In particular, while the business sentiment index for manufacturing export firms (103.4) was relatively high, the service sector recorded 92.9, showing a significant disparity. The economic sentiment index, which includes both businesses and consumers, also fell to 91.7 in April, dropping 2.3 points from the previous month; consequently, despite a surge in exports and a recovery in growth, the actual economic outlook is not particularly bright. Ultimately, the economic situation shows a clear polarization between the export and domestic sectors, so the key question is how much the boom led by large export companies will spread to the upper end of the domestic market.

Fortunately, a recovery trend in consumer spending has recently been confirmed. Retail sales, which had been falling since mid-2022, rose after the third quarter of 2025, increasing by 2.4% quarter-on-quarter in the first quarter of 2026 and by 1.8% month-on-month in March. Service production also increased by 1.4% in March, and credit card usage showed an upward trend in April.

Meanwhile, it should be noted that recent income distribution indicators have not improved. According to the National Tax Service's integrated income data for the 2024 fiscal year, the concentration of the top 10% on an individual basis declined from 2021 to 2023 but rose slightly to 37.2% in 2024. The Gini coefficient for household income from the Household Financial and Welfare Survey also increased slightly in 2024 based on both market income and disposable income, indicating a deterioration in income distribution. In particular, along with rising real estate prices, asset inequality has continued to intensify since 2018. The Gini coefficient for net assets in 2025 is projected to be 0.625, with the share of the top 10% reaching 46.1%, slightly higher than the previous year. After recording negative figures in 2022 and 2023 due to rising inflation , the real wage growth rate recovered slowly to 0.5% in 2024 and 0.9% in 2025, rising slightly after the fourth quarter of 2025. When comparing the sum of nominal wages in January and February of 2025 and 2026, taking into account the Lunar New Year effect, there was an increase of approximately 7%. However, during the same period, while wages in companies with 300 or more employees rose by about 9% due to expanded performance bonuses at large corporations, wages in companies with fewer than 300 employees increased by only 1%. The gap in the dual labor market between large corporations and SMEs remains severe. According to the Workforce Survey of Businesses, as of 2025, the wages of workers in SMEs with fewer than 300 employees are only about 58% of the wages of workers in large corporations with 300 or more employees. Although the unemployment rate is not high, it is concerning that the proportion of the population that is neither working nor looking for a job—particularly among young people in their 20s and 30s—has continued to rise since 2021.

How to share the fruits of growth

When corporate profits rise and stock prices increase, it is good news for investors, and the government can also boast about the achievement of the KOSPI's rise. However, although the number of individual investors has increased significantly since 2020 to currently stand at 14.4 million, stock ownership is highly concentrated, meaning the benefits of rising stock prices are being funneled to a select few. By the end of 2023, the top 1% held approximately 53% of the total stock value, while the top 10% held over 80%. Meanwhile, among workers, there is a possibility that the so-called "dual labor market" issue—the gap between regular employees at large corporations and the non-regular workers in small and medium-sized enterprises (SMEs), who make up over 80% of the workforce—will widen further. Semiconductor companies like SK Hynix and Samsung Electronics, which have recorded massive operating profits, are expected to pay performance bonuses amounting to hundreds of millions of won per worker this year. The labor union at Samsung Electronics, which is projected to generate over 300 trillion won in operating profit, is demanding a cash performance bonus equivalent to 15% of that operating profit and has even threatened a strike. However, there is growing criticism that Samsung Electronics' massive operating profit also belongs to numerous partner companies and subcontracted workers, as well as the government and local residents who provided 22 trillion won in tax breaks over three years.

Therefore, the immediate challenge facing the Korean economy is to prevent the boom driven by manufacturing exports, such as the semiconductor industry, from following a widening K-shaped curve and to ensure that the fruits of growth are shared by the community. Above all, the formation of unions by workers in subcontracting SMEs and non-regular workers must be promoted to strengthen their bargaining power. Furthermore, I hope that efforts to institutionalize cooperation between labor and management at large corporations—by establishing a cooperation fund through concessions to support wage increases for workers in subcontracting SMEs—will be realized. The government's role in assisting vulnerable groups and redistributing income must also be further strengthened. While Korea has relatively low income inequality based on market income compared to other OECD countries, income inequality based on disposable income is very high due to weak income redistribution. Although Korea's social expenditure as a percentage of GDP rose to 15.3% in 2024, it remains lower than the OECD average of 21.2%, and Koreans tend to pay relatively low taxes internationally. The tax burden as a percentage of GDP in 2025 is 18.4%, which is significantly lower than the OECD average of about 25% and is the lowest level among developed countries.

For example, due to various deductions, Korea's effective earned income tax rate is very low internationally. As the figure above shows, the top 9-10% income bracket has a total salary of 91 million won with an earned income tax burden of 7.8%, while the top 19-20% bracket has a total salary of 65 million won with an effective tax rate of merely 4.7%. There is still no news regarding the introduction of the Financial Investment Income Tax, which has been continuously postponed due to concerns about its negative impact on the stock market, even now that the KOSPI has surpassed 7,500. Furthermore, corporate tax revenue is expected to rise significantly as profits in the semiconductor industry grow substantially thanks to the AI ​​boom over the next few years; therefore, in-depth discussion is needed on how to utilize this increased tax revenue to promote the development of future industries and alleviate economic disparities. It is now time to initiate a productive and heated debate to ensure that the "K-economy," which represents Korea, does not become a "K" shaped by widening disparities.

(This article was originally published as a column in Hankyoreh in Korean and translated into English with the help of Google Translate. The views expressed in this article are those of the author(s) and do not represent the official stance of the center.)