KDI report warns productivity slowdown could amplify capital outflow

Containers wait to be shipped at a port in the southeastern city of Busan, April 1. Yonhap

A slowdown in Korea's production output could lead to a rise in the outflow of domestic capital, ultimately amplifying the decline in the country's real gross domestic product (GDP), a key gauge of economic growth, a report by the state-run economic think tank said Tuesday.

In its latest economic review, the Korea Development Institute (KDI) made the assessment, emphasizing the need for structural reforms aimed at boosting productivity.

Since 2000, labor input growth has gradually slowed, but the rate of productivity growth has decelerated much more sharply, leading to a fall in capital profitability, a key determinant in investment decisions, the report said.

According to KDI, the rate of return on domestic investment has fallen rapidly, dropping below that of overseas investment since the mid-2000s.

As a result, the ratio of net overseas investment to national income rose sixfold, from an average of 0.7 percent between 2000 and 2008 to 4.1 percent between 2015 and 2024.

According to KDI's macroeconomic simulation, a 0.1 percent decline in productivity results in 1.5 times of contraction in GDP, highlighting the magnified impact of productivity shocks on the broader economy.

"A slowdown in productivity leads to a decline in the rate of return on capital, which in turn shifts domestic investment toward overseas markets," the report said.

Citing a similar case in Japan's economy in the late 1980s, the KDI advised that Korea should foster an environment that allows promising innovative firms to enter the market.

The institute also called for a more flexible labor market to help drive productivity improvements across the export-dependent economy.