Extract D

Figure 1: Real GDP growth rates (%) for South Korea and Taiwan, 2022 to 2027

Figure 2: CPI Inflation rates (%) for South Korea and Taiwan, 2022 to 2027

Extract E: Demographic Drag and the East Asian Stagnation

The concept of 'secular stagnation' describes a prolonged deficiency in aggregate demand relative to a nation's productive potential. This is characterized by sluggish economic growth, persistent near-zero inflation or outright deflation, and nominal interest rates stuck near the zero lower bound. In advanced East Asian economies like South Korea and Taiwan, this structural stagnation is heavily driven by 'demographic drag'—rapidly ageing workforces and ultra-low fertility rates that induce households to save excessively for retirement. This structural shift is compounded by high private debt levels. In South Korea, household debt exceeds 100% of GDP, which severely dampens consumer spending, while Taiwan's firms have grown cautious, prioritizing cash accumulation over domestic capital investment.

Many economists suggest this demand-side deficit demands sustained, direct government intervention to kickstart growth. Conversely, supply-side advocates argue that structural bottlenecks are the core issue. They propose that long-term stagnation is better cured through structural reforms, such as deregulating the service sectors, raising the retirement age, boosting female labour force participation, and incentivizing semiconductor and automation research. Critics of aggressive fiscal stimulation also warn that massive government borrowing can lead to crowding out of private capital and escalate sovereign credit risks.

Extract F: The limits of monetary and fiscal tools

For several years, the Bank of Korea and the Central Bank of the Republic of China (Taiwan) have implemented highly accommodative monetary policies. Official policy rates have hovered near historic lows, and central banks have deployed targeted credit facilities and liquidity programs to support commercial lending. Yet, despite these efforts, domestic demand remains soft, leading critics to claim that monetary policy has reached its limits and is now akin to 'pushing on a string'.

If monetary policy is no longer tractionable, expansionary fiscal policy becomes the primary alternative. However, both nations face unique institutional and macroeconomic hurdles to fiscal expansion. While South Korea's sovereign debt-to-GDP ratio has historically been moderate (around 50%), it is rising rapidly due to expanding social welfare commitments, sparking intense political debates. Taiwan, meanwhile, operates under a strict statutory cap on public debt under its Public Debt Act, which legally limits discretionary fiscal expansion. Proponents of expansionary fiscal policy argue that these constraints are overstated: when interest rates are trapped at the zero lower bound, the Keynesian multiplier is exceptionally high. Targeted state spending on green infrastructure, digital transformation, and advanced research may be the only reliable path out of stagnation. Nevertheless, the policy path forward remains highly contentious if low demand and persistent deflationary expectations harden into a permanent low-growth trap.

---

Extract F states: "What is not clear is what should be done if low inflation and weak demand turn into a permanent low-growth trap."