Why Korea's economic growth has slowed since 1990s

Passengers walk past Gwanghwamun Square in Seoul, Oct. 10. Yonhap

Korea's structural growth slowdown since the 1990s has been driven by the prolonged survival of marginal firms during a series of financial crises, the Bank of Korea (BOK) said in a report Wednesday.

The persistence of these underperforming companies has weakened corporate dynamism and disrupted the efficient reallocation of capital and labor, ultimately weighing on long-term growth, the central bank said.

"Korea's economic growth rate has gradually declined after each crisis — the 1997 Asian financial crisis, the 2008 global financial crisis and the 2020 COVID-19 pandemic," the report said. "This contrasts with the post-oil shock rebound of the 1970s, when growth exceeded its prior trend."

Firm exit rates in Korea remained low through multiple crises.

The government continued to extend loans and support to distressed firms with little chance of recovery, and allowed them to survive to prevent a wave of corporate bankruptcies. While they helped ease financial constraints, low profitability led to a slowdown in private investment.

For instance, both Korea and the U.S. saw fewer new business entries during the 2008 global financial crisis and 2020 pandemic. But exits rose only in the U.S. In Korea, exits remained muted, and even declined during the pandemic.

The presence of such firms distorts competition and locks capital and labor into low-productivity sectors, the report said. That crowds out newer, more efficient companies and drags on overall productivity.

From 2014 to 2019, about 4 percent of Korean firms were deemed high-risk, yet just 2 percent exited — half the expected rate. Replacing them with more viable businesses could have lifted domestic investment by 3.3 percent, boosting GDP growth by 0.5 percentage point, the BOK estimated.

A similar pattern emerged from 2022 to 2024. High-risk firms accounted for 3.8 percent of the total, but exits were just 0.4 percent. The BOK said GDP could have been 0.4 percentage point higher if those firms had been replaced by stronger ones.

"Korea's investment and GDP could have fully recovered to pre-crisis trends if the economic downturns hadn’t resulted in prolonged demand weakness," the report wrote. "Rather than protecting individual companies, it's more important to maintain the overall health of the industrial ecosystem."

The central bank urged more targeted government support to improve market dynamism. That includes aiding key sectors, firms with temporary liquidity issues and early-stage innovators, while avoiding broad-based interventions that keep struggling companies afloat.

Easing regulations is also key to developing emerging industries and maintaining Korea's competitive edge in core areas like semiconductors and autos.