Korea's growth potential predicted to fall below 3% after 2016

By Choi Sung-jin

The Korean economy’s potential growth rate will fall below 3 percent in the next five years and hit 2 percent in a decade, a think tank forecast Monday.

According to Hyundai Research Institute, the nation’s potential growth rate is expected to fall to 2.7 percent during the 2016-2020 period, entering into the 2-percent range for the first time.

Korea’s potential growth rate, which stood at 3.9 percent in the 2006-2010 period, dropped by 0.7 of a percentage point to 3.2 percent in the 2011-2015 period. It is expected to fall to 2.3 percent in the 2021-2025 period and to 2.0 percent in the 2026-2030 period, the report said.

The potential growth rate is the maximum growth rate a country can attain by mobilizing all production elements available, including capital and labor, and without causing inflation. It is a “growth rate within our means,” as Bank of Korea Governor Lee Ju-yeol described it recently. The concept is used mainly to indicate an economy’s mid- to long-term growth trend.

The central banks has estimated the potential growth rate at 3-3.2 percent in the 2015-2018 period, the Korea Development Institute put it at 3 percent for the 2016-2020 period, and the LG Economic Research institute set it at 2.5 percent for the 2015-2019 period.

The domestic manufacturing industry’s potential growth rate was 4.4 percent in the 2011-2015 period. It stood higher than the overall economy’s potential growth rate but has fallen by about 1 percentage point every five years, from 8.9 percent in 1991-1995 to 7.9 percent in 1996-2000, to 6.9 percent in 2001-2005, and to 5.8 percent in 2006-2010.

Particularly, the manufacturing sector’s contribution to total factor productivity, which indicates its speed of technological progress, plunged from 6 percentage points in 2001-2005 to 4.3 percentage points in 2006-2020 and to 2.1 percentage points in 2011-2015.

On the other hand, the dwindling labor input by manufacturing industry has turned upward since 2011.

The slowing speed of technological progress and increasing labor input reveals the growing inefficiency in the manufacturing industry, the report points out.

“Korea’s manufacturing industry has failed to get out of the old system that resorts to voluminous expansion rather than shifting to innovation-based growth,” said researcher Kim Cheon-koo.

The service industry’s potential growth rate has also been falling rapidly. The sector’s potential growth rate was 7.8 percent in 1991-1995, but has since steadily fallen until it reached 2.9 percent in 2011-2015. This was because labor input increased not in high value-added businesses but in low value-added ones, making it difficult for the service industry to get out of the labor input-oriented growth pattern.

The share of labor input in the service industry’s total output grew from 38.8 percent in 2001-2005 to 40.2 percent in 2011-2015.

The outlook for the construction industry is also far from bright. The sector’s potential growth rate remained in negative territory of -0.5 percent in the 2011-2015 period as the industry has failed to make technological innovation and has lost growth momentum.

“To prevent the fall of the major industries’ potential growth rates and restore growth momentum, Korea needs labor market reforms and more creative activities through competition at markets,” Kim said.