"Potential Growth Rate Decline by 45% Over 10 Years...Urgent Recovery Measures Needed"

Hankyungyeon, Decomposition of Potential Growth Rate per Working-Age Population and Policy Implications

[Asia Economy Reporter Kim Heung-soon] An analysis has emerged indicating that the decline rate of the potential growth rate per working-age population in South Korea is accelerating. Experts warn that if this is left unaddressed, the Korean economy could face a structural recession, making urgent countermeasures necessary.

The Korea Economic Research Institute (KERI), under the Federation of Korean Industries, revealed this on the 18th through an analysis titled "Decomposition of Factors Affecting Potential Growth Rate per Working-Age Population and Policy Implications." The potential growth rate per working-age population refers to the year-on-year growth rate of potential Gross Domestic Product (GDP) per working-age population aged 15 and above.

Using annual data from 1981 to 2019, KERI estimated the potential growth rate per working-age population in 10-year intervals. The average potential growth rates per working-age population by period were 7.6% in the 1980s (1981?1989), 5.3% in the 1990s (1990?1999), 3.8% in the 2000s (2000?2009), and 2.1% in the 2010s (2010?2019), showing a steady slowdown.

The decline rate of the potential growth rate per working-age population also eased slightly from -30.3% in the 1990s to -28.3% in the 2000s, but then steepened again to -44.7% in the 2010s.

Declines Observed in Total Factor Productivity, Capital Stock, and Working Hours Besides Employment Rate

KERI decomposed the potential growth rate per working-age population into its components?total factor productivity, capital stock, working hours, and employment rate?and estimated the growth rates in 10-year intervals from the 1980s to the 2010s.

According to the analysis, the growth rate of total factor productivity, which represents the value added created by intangible production factors such as regulation and technological development beyond labor and capital, declined from 6.4% in the 1980s to 4.2% in the 1990s, 4.1% in the 2000s, and 2.9% in the 2010s.

The growth rate of capital stock, representing the total accumulated capital, also slowed significantly after peaking in the 1990s, recording 0.7%, 2.1%, 0.3%, and 0.0% respectively during the periods.

The average working hours growth rate showed a sharp downward trend, with 0.1%, -0.8%, -0.9%, and -1.2% over the same periods. In contrast, the employment rate growth rate remained relatively stable at around 0.4%, except for a dip to -0.2% during the 1990s when the Asian financial crisis occurred.

Summarizing the trends of each factor, total factor productivity and average working hours have declined most rapidly since the 1980s, followed by a sharp decline in capital stock factors, while the employment rate factor has maintained relative stability.

"To Expand Growth Potential, Corporate Innovation Must Be Encouraged and Total Factor Productivity Enhanced"

KERI interpreted the recent acceleration in the decline of the potential growth rate per working-age population as a sign that South Korea’s economic growth potential is rapidly weakening.

They added, "If left unchecked, this could lead to a rapid deterioration of the economy’s fundamental strength, resulting in a structural recession. Considering the sharp decline in total factor productivity growth, reduced labor input due to low birth rates and aging, and difficulties in large-scale facility investment, this is not merely a concern but a likely reality."

Choo Kwang-ho, Director of Economic Policy at KERI, stated, "Since labor and capital inputs face limits in expansion during economic growth, efforts to enhance total factor productivity must be prioritized to expand growth potential. To achieve this, corporate regulations should be overhauled to encourage innovation, and tax incentives should be strengthened to promote research and development (R&D) and technological advancement."

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