ED Loss of growth potential

Time to push for structural economic reform

South Korea's potential growth rate has continued to fall over the decades, clouding its future economic prospects. The fall was the direct result of a decline in labor productivity, capital accumulation and working hours.

According to a report by the Korea Economic Research Institute (KERI), the potential growth rate decreased to 2.1 in the 2010s from 3.8 percent in the 2000s, 5.3 percent in the 1990s and 7.6 percent in the 1980s. No one can rule out the possibility of the rate dropping further in this decade or next.

Potential growth rate refers to the growth capacity of an economy. A dip in this rate bodes ill for economic growth from a long-term perspective. The rate's drop means a loss of the basic strength of the economy.

In order to reverse the downward trend, the country needs to improve labor productivity and replenish capital. Increasing working hours is, however, a remote possibility as the country has introduced a shortened five-day workweek.

As things stand, concern is growing that the country could suffer an economic contraction unless it expands its growth capacity. The International Monetary Fund (IMF) estimated South Korea's potential growth rate at 2.5 percent in the 2020s and 2 percent in the 2030s. The Hyundai Research Institute is more pessimistic, predicting the rate will drop to 1.9 percent between 2026 and 2030 after posting 2.1 percent between 2021 and 2025.

The Korean economy is forecast to grow by around 4 percent this year. This is a robust rebound from a 0.9 percent contraction in 2020 when the economy was hit hard by the COVID-9 pandemic. However, the country is expected to face slower economic growth next year ― possibly due to the sapping growth potential.

The country has already entered a low-growth era. The most serious problem is that Korea has continued to lose its economic vitality and growth momentum. The falling birthrate and fast population aging could aggravate the economic situation further.

The birthrate fell to 0.84 in the second quarter of this year, the lowest among 37 OECD member states. The proportion of people aged 65 and older is predicted to account for 20 percent of the entire population in 2025, up from 14 percent in 2017. This demographic problem is feared to reduce the nation's workforce, casting a darker cloud over the economy.

Now the Moon Jae-in administration should push for regulatory reform to raise productivity, promote entrepreneurship and encourage innovation. It also must carry out structural economic reforms to improve the country's competitiveness. Most of all, it is urgent to develop a new growth engine for the economy.