"Possibility of Negative Potential Growth Rate in Korea by 2045... Need to Improve Productivity"

[Asia Economy Reporter Eunbyeol Kim] As the Korean economy faces a crisis due to the shock of the novel coronavirus infection (COVID-19), experts have pointed out that a decline in potential growth rate is inevitable if productivity or labor force, which have continuously decreased, are not improved. In a negative scenario, it is also analyzed that the potential growth rate could possibly record a negative value.

On the 13th, Park Sung-wook, head of the Macroeconomic Research Office at the Korea Institute of Finance, stated at the academic conference titled "Seeking Directions for Sustainable Growth of the Korean Economy" held at the Bankers' Hall in Jung-gu, Seoul, "If a negative scenario applies to total factor productivity, labor force, and capital, the growth rate could fall to -0.56% by 2045."

This assumes that the total factor productivity growth rate is about 0.21%, recording the average of the bottom three countries over the past four years according to the Korea Productivity Center, the economic activity participation rates of women and those aged 60 and over do not increase, and the capital growth rate decreases at a slope similar to the population growth rate. Even if all factors determining the potential growth rate act positively, it is estimated to remain at around 2.1%.

Park said, "Even under a very positive scenario, the potential growth rate barely reaches the 2% range," adding, "Depending on the situation, negative growth cannot be ruled out."

The potential growth rate is the maximum growth rate achievable by efficiently utilizing labor and production facilities without overheating the economy, serving as an indicator of the economy’s fundamental strength. It is usually estimated by reflecting changes in production factors such as labor input, capital growth, and total factor productivity. Korea’s potential growth rate is estimated to be about 2.5%, but it is expected to have declined further due to the COVID-19 pandemic.

Economic experts believe that since capital growth is difficult to change, raising labor input and productivity can increase the potential growth rate. In particular, Park explained, "Improving productivity is efficient in raising the growth rate," adding, "Because it is impossible for the economic activity participation rates of women or the elderly to increase indefinitely."

Low labor productivity was cited as the reason for Korea’s declining productivity. Park Jung-soo, professor of economics at Sogang University, said, "Korea’s GDP per hour worked ranks 32nd among OECD countries," and added, "Individuals are barely raising low productivity by increasing their working hours."

He pointed out the large proportion of self-employed and small businesses (10?49 employees) with low productivity, as well as excessive support or protection policies for small and medium-sized enterprises (SMEs). Professor Park said, "While support for SMEs is good, we need to consider whether increasing the number of SMEs alone was our goal."

There was also a call to change the direction of human capital investment to improve the quality of the labor force. Ha Joon-kyung, professor of economics at Hanyang University, explained, "Comparing per capita public education consumption and its growth rate by age between 2010 and 2016, it can be seen that government investment in education sharply decreases from age 18," adding, "In Korea, there is insufficient vocational training for second careers and smooth restructuring."

He further emphasized, "Since public education does not sufficiently replace private education, a private education craze occurs, and highly educated women voluntarily experience career breaks," adding, "By adjusting the difficulty of the College Scholastic Ability Test (CSAT) appropriately and expanding regional balanced admissions at universities, the profitability of private education would decline, helping women overcome career breaks and alleviating low birthrate and population concentration problems."

This academic conference was jointly hosted by the Korean Economic Development Association, the Korea Institute of Finance, and the Seoul Social Economy Research Institute.

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