The Bank of Korea: "Productivity Decline Shock Large with Export Decrease... Electronics Components and Chemicals Hit"

If exports increase by 1%P, productivity rises by 0.03%P
The productivity decline shock is greater when exports decrease than when they increase

[Asia Economy Reporter Eunbyeol Kim] The slowdown in productivity among South Korean manufacturing companies has been found to be related to a decrease in exports. In particular, the negative impact on productivity when exports decline is much greater than the productivity increase when exports rise.

According to the 'BOK Economic Research - Analysis of the Relationship Between Exports and Productivity in Manufacturing' released on the 3rd by Jin-ho Park, a research fellow at the Bank of Korea Economic Research Institute, a 1 percentage point increase in exports results in only a 0.03 percentage point increase in total factor productivity of manufacturing companies.

This result comes from an analysis of manufacturing exports and productivity from 2000 to 2017. The average annual export growth rate fell from 10.6% during 2000-2009 to 6.5% during 2010-2017, and the average annual total factor productivity growth rate slowed from 1.5% to 0.2% over the same period.

In particular, the ripple effect when exports decrease is greater than the productivity increase when exports rise. According to the study, the estimated productivity coefficient when exports increase was 0.005, whereas the productivity coefficient when exports decrease was 0.057, more than 10 times larger and statistically significant.

Research fellow Park said, "The productivity slowdown mainly occurred during periods when the export growth rate declined," adding, "Although the timing of export growth rate declines varies by industry, the recent productivity slowdown may be closely related to the decline in export growth rates."

The reason productivity falls when exports decrease is that the inputs to productivity, such as labor and capital, were not flexibly adjusted. Simply put, when exports decline due to economic slowdown or worsening trade conditions, companies try to adjust labor or capital to mitigate the drop in productivity, but companies that find such adjustments difficult suffer more damage. Industries with inelastic labor and capital input elasticity include electronic components, chemicals, precision instruments, and assembly machinery.

Research fellow Park stated, "In principle, if employment flexibility is achieved, the decline in productivity caused by export decreases can be reduced." However, he added, "This study analyzed the number of workers including executives, so if it had been based on working hours, the results might have been different."

Although this study was based on data up to 2017, the spread of the novel coronavirus disease (COVID-19) has caused shocks on both demand and supply sides, which is expected to affect productivity decline. Research fellow Park emphasized, "The study results show that productivity decreases much more significantly when exports decline than it increases when exports rise," adding, "Without continuous investment or technological innovation through research and development, it is difficult to expect productivity to increase simply because exports increase."

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