Hankyung Research Institute: "Sharp Decline in Economic Growth Rate Over 20 Years... Need for Productivity Improvement and Regulatory Reform"

[Asia Economy Reporter Ki-min Lee] It has been argued that productivity improvement and regulatory reform are necessary to slow down the rapid decline in South Korea's economic growth rate.

The Korea Economic Research Institute under the Federation of Korean Industries announced on the 19th that an analysis of the economic growth rate, potential growth rate, and GDP gap rate of OECD countries from 2001 to 2019 showed that South Korea's economic growth rate experienced the fifth largest decline among OECD countries.

The institute explained that South Korea's economy recorded a 5% growth rate from 2000 to 2005, but it rapidly declined to 2.7% from 2016 to 2019. This decline was the fifth largest among OECD countries during the same period, following Latvia (5.1 percentage points), Lithuania (4.1 percentage points), Estonia (3.3 percentage points), and Greece (2.7 percentage points).

In particular, South Korea's growth rate, which had been more than 2.7 percentage points higher than the OECD average growth rate, narrowed to a difference of 1.2 percentage points between 2011 and 2015 after 2010. This further decreased to 0.6 percentage points from 2016 to 2019. The gap with the global economic growth rate also turned negative after 2011, widening gradually to 0.4 percentage points between 2011 and 2015 and 0.6 percentage points from 2016 to 2019.

The Korea Economic Research Institute pointed out that although the global economic growth rate has been slowing since the 2000s, the decline in South Korea's growth rate is notably large compared to other OECD countries. Among the 23 OECD member countries with per capita income exceeding $30,000, South Korea experienced the largest drop in growth rate.

The potential growth rate also fell from 4.7% between 2001 and 2005 to 3.0% between 2016 and 2019, dropping to two-thirds of its previous level, ranking eighth fastest decline among OECD countries. The potential growth rate refers to the maximum growth achievable by fully utilizing all production factors without causing inflation.

While South Korea's potential growth rate decreased by 1.7 percentage points, the average potential growth rate of OECD countries fell by only 0.4 percentage points. The potential growth rate, which was as high as 5.4% in 2001, dropped to 2.7% in 2019, falling to half its level in 18 years. Countries with a greater decline in potential growth rate than South Korea included Estonia (3.2 percentage points), Finland (1.7 percentage points), Greece (3.0 percentage points), Latvia (3.3 percentage points), Lithuania (3.5 percentage points), Slovakia (2.4 percentage points), and Spain (2.4 percentage points), totaling seven countries.

In contrast, during the same period, six countries?Germany (0.8 percentage points), Denmark (0.3 percentage points), Ireland (0.7 percentage points), Israel (0.0 percentage points), Mexico (0.2 percentage points), and Turkey (1.6 percentage points)?saw their potential growth rates increase.

The Korea Economic Research Institute argued that since the potential growth rate represents the fundamental strength of the economy and does not change in the short term, the large decline in South Korea's potential growth rate indicates a rapid decrease in growth potential.

Furthermore, it was pointed out that South Korea's economy continues to grow below its potential growth rate. The GDP gap, which represents the difference between actual GDP and potential GDP, recorded a negative value. This gap widened from 0.1% between 2011 and 2015 to 1.4% between 2016 and 2019.

The GDP gap rate is the ratio of the difference between actual GDP and potential GDP to potential GDP. A negative GDP gap means that the economy is losing momentum to the extent that it falls short of its potential GDP.

On an annual basis, actual GDP has been below potential GDP for the past seven years since 2013, with the gap gradually widening. In 2019, South Korea's GDP gap rate was 2.1%, ranking fifth largest after Greece (10.1%), Chile (3.8%), Mexico (3.0%), and Italy (2.3%) in terms of the difference between potential and actual growth.

While it is common for growth rates and potential growth rates to slow down as an economy develops and matures, the Korea Economic Research Institute explained that South Korea's decline is particularly pronounced. It emphasized the need for factors that can inject dynamism into the economy to slow the decline in growth rate.

Choo Kwang-ho, head of the Job Strategy Office at the Korea Economic Research Institute, said, "With the decrease in the working-age population starting this year, the demographic cliff is becoming a reality, and its negative impact on growth rate is expected to become more visible." He added, "To slow the declining growth rate, it is necessary to secure economic dynamism through productivity improvement, bold regulatory reforms, fostering new industries, and creating high value-added services."

This content was produced with the assistance of AI translation services.