"0.5%P Increase in Economic Growth Rate per 1-Point Improvement in Regulatory Index... Need for Deregulation of New Growth Areas"

[Asia Economy Reporter Jeong Hyunjin] An analysis from the Canadian think tank Fraser Institute suggests that if the regulation index within the Economic Freedom of the World Index improves by 1 point, the economic growth rate in the following year could increase by 0.5 percentage points, generating an economic effect of approximately 10.4 trillion KRW. It was argued that if South Korea continues its current productivity trend without regulatory innovation, the economic growth rate after 2020 is expected to slow down to the high 1% range.

The Korea Economic Research Institute (KERI), under the Federation of Korean Industries, revealed this in its report titled "Economic Impact and Implications of Regulations on New Growth Industries" on the 2nd. According to the regulation index included in the Economic Freedom of the World Index published by the Fraser Institute this year, South Korea recorded 7.6 points in 2017 but dropped to 7.4 points in 2019, declining for two consecutive years, indicating that regulations are tightening.

KERI conducted an empirical analysis on the impact of regulations on economic growth using the regulation index from the Fraser Institute's Economic Freedom of the World Index, as well as data from the World Bank (WB) and the Organisation for Economic Co-operation and Development (OECD). The results showed that the regulation index positively affects economic growth. Since a lower regulation index score indicates stronger regulations and a higher score indicates fewer government regulations, the analysis concluded that economic growth increases as regulations are eased.

Assuming other factors remain constant, KERI analyzed that a 1-point increase in the regulation index would raise the economic growth rate by 0.5 percentage points in the following year. Furthermore, South Korea's nominal GDP in 2020 was approximately 1,933 trillion KRW, with a GDP growth rate of -0.9%. If the regulation index increases by one unit (regulatory easing) from the current level, it is estimated that the GDP would increase by about 0.54 percentage points, equivalent to approximately 10.4 trillion KRW.

KERI pointed out that from 2017 to last year, the average annual growth rate of sales in new growth industries was 1.9%, lower than the 2.5% growth rate of all industries, indicating that new growth industries, which should lead the Fourth Industrial Revolution, are not growing. Although the government is promoting comprehensive negative regulatory reform policies and regulatory sandboxes, the perception of regulatory reform within the industry remains low despite the government's deregulation efforts. Additionally, the pace of deregulation is not keeping up with the speed of industrial development, leading to a decline in companies' perception of regulatory reform.

Upon reviewing the status of South Korea's new growth industries, KERI noted that industries representing the Fourth Industrial Revolution, such as Artificial Intelligence (AI), Internet of Things (IoT), and Big Data, are facing difficulties in technological development and commercialization due to various regulations including the Personal Information Protection Act, the Information and Communications Network Act, and the Automobile Management Act. It was argued that innovative regulatory easing should be pursued through creative ideas, similar to the total regulatory cost system in the United States, the regulatory sandbox in the United Kingdom, and the risk-based tiered obligations under the European Union's "Artificial Intelligence Act."

Moreover, considering recent regulatory indices, national competitiveness rankings, and the number of new unicorn companies, KERI stated that the limited development of South Korea's new growth industries is due to the level of regulations and support policies lagging behind advanced countries. It emphasized the need to establish a legal foundation for new industry growth and to promote regulatory easing so that small and venture companies can easily enter the market and commercialize creative ideas.

KERI Deputy Research Fellow Lee Gyuseok said, "Considering that leading the Fourth Industrial Revolution in the post-COVID-19 era is a top priority for the country's future, it is necessary to create a foundation for new growth industry companies to grow by easing regulations that match the pace of technological development and industrial realities, enabling domestic companies to take the lead in the Fourth Industrial Revolution."

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