Value context and insight. lkm@koreatimes.co.kr
Korea's growth engine rapidly losing steam
By Lee Kyung-min
By Lee Kyung-min
Korea's growth engine is losing steam, indicated by a steady decline in the potential growth rate amid a lack of innovation to offset a rapid reduction in both the workforce and capital, economists said Monday.
Inefficiency in research and development (R&D) with overall poor infrastructure compounded by excessive regulations, they noted, push the country's talented youngsters to prioritize job security and stability over taking chances to learn from failure, a reason why Asia's fourth-largest economy is increasingly becoming “dumb by choice.”
They say the government developing a clear understanding of its role and limitations will be the first step toward helping enrich entrepreneurship, the key element of success and a growth driver desperately needed in a country bound to experience what seems to be the beginning of a long tunnel of low growth.
The concern is backed by recent report from the Organization for Economic Cooperation and Development (OECD) which showed Korea's potential growth rate is expected to fall to 2.5 percent in 2020, down 0.2 percentage points from a year earlier.
The projected figure for 2021 is 2.4 percent.
A potential growth rate refers to the maximum possible rate an economy can grow without triggering inflation.
R&D
“The answer lies with R&D,” Hyundai Research Institute (HRI) Economy Deputy Director Ju Won said.
“The limitations are clear in increasing labor and capital, so R&D-driven technological innovation will define whether the country will manage to find growth.”
The assessment is in line with Korea's plummeting, record-breaking low birthrate.
The low figure is speeding up Korea's progress towards becoming an ageing society, leading to a shrinking workforce.
Also unhelpful is the country's matured economy, whereby no heavy capital injection is possible like it saw in 1970s and 80s under the rapid industrialization backed by a construction and facility investment boom that continued through the early 1990s.
In the 1980s, according to an HRI report, construction, facility and intellectual property businesses saw double-digit year-on-year growth, but the figure dropped to between 1 percent and 5 percent in the last decade.
“The country's key growth driver was and still is automobiles and semiconductors. The need is growing for a new industry to emerge as a new growth engine, but other sectors including logistics, storage, finance and insurance businesses are struggling to create high-value work in time,” Ju said.
The HRI forecast that the nation's potential growth rate will fall to 1.7 percent between 2031 and 2035.
Private sector-led efficient R&D projects are, he added, undermined by the government-led ones, leading to an undervalued, underappreciated sector as a whole.
“The government projects are defined more by short-term budget execution than long-term profitability and sustainability, not to mention the political intervention veering large state-funded projects off track. This undermines the private sector R&D, half of which is accounted for by Samsung Group,” he said.
The HRI report said Korea's R&D investment-to-GDP ratio topped the list of OECD members at 4.6 percent in 2017, a notable jump from 2000, when it remained at 2.2 percent, only 0.1 percentage point higher than the OECD average of 2.1 percent.
Yet the country's OECD-developed triadic patent family count per 10,000 researchers, a measure of research quality and efficiency, remained below average.
Korea's figure was 83.9 in 2000, while OECD average was 175.9. It jumped to 93.1 in 2010, but fell to 71.9 in 2016, while the OECD average was 120.2 and 104.9, respectively.
Defined as a set of patents registered in various countries to protect the same invention, the families are a set of patents filed at these major patent offices: the European Patent Office (EPO), the Japan Patent Office (JPO) and the U.S. Patent and Trademark Office (USPTO).
Gov't overstepping
The government should not dictate how and where the R&D should focus, an area businesses know best because corporate success by nature depends on it, according to another economist.
“There is only so much that labor and capital input can do to bolster growth, so the answer is to create an environment that is most conducive to corporate growth and possible subsequent success,” Seoul National University economist Kim So-young said.
The government should instead create a region with enhanced living conditions to retain foreign talent here, something the businesses need help with.
“Brain drain is a problem defined by not only Koreans leaving but competent foreign workers refusing to come here altogether. The government should build a city or a region with infrastructure to help them feel motivated to stay,” Kim said.
More measures are required to better utilize a high-quality workforce, notably women leaving the workforce to raise children and retirees in their late 40s to early 50s, the two groups with ample work experience and knowledge in a certain career field, according to LG Economic Research Institute research fellow Cho Young-moo.
“Birthrate-boosting measures over the past few years have abjectly failed, with taxpayers' money wasted and the chronic problem exacerbated,” Cho said.
Hiring a high-quality labor force for part-time work in his view could be an option.
Cho dismissed criticism that part-time jobs are not considered to be good quality, adding that the country should look to how advanced economies are utilizing those groups.
“Efficient, demand-based management of the labor force is how countries in Europe and other advanced economies are putting to effective use what would otherwise have become wasted resources. It is the government's job to identify the market supply and demand and create a system whereby people willing to work are able to do so with each individuals' needs satisfied. That is the way to bolster growth and productivity,” he added.