Hankyung Research Institute: "1% Increase in Corporate Economic Freedom Raises GDP by 0.36%"

Private Sector's Free Economic Activities Must Be Promoted

It has been argued that as economic freedom increases, economic growth is promoted and the quality of life of the people improves, necessitating the promotion of free economic activities in the private sector.

On the 24th, the Korea Economic Research Institute (KERI) analyzed in its report titled “The Impact and Implications of Free Market Economy on Growth, Corporate CSR, and Quality of Life” that a 1% improvement in economic freedom leads to a 0.13% increase in total factor productivity and a 0.36% rise in gross domestic product (GDP). Economic freedom is an indicator that shows how well institutions and policies align with economic freedom.

An analysis of the relationship between the 2021 economic freedom and per capita GDP of OECD member countries revealed a positive correlation (correlation coefficient +0.46) between the two. South Korea’s economic freedom increased from 5.49 to 7.42 over the past 50 years (1970?2020). During the same period, private expenditure increased by KRW 1,242.1 trillion (from KRW 73.7 trillion to KRW 1,315.8 trillion), which is 3.2 times the increase in government expenditure of KRW 385.9 trillion (from KRW 26.5 trillion to KRW 412.4 trillion). The economic activity participation rate of the population also rose by 4.9 percentage points, from 57.6% to 62.5%.

With the improvement of economic freedom, the power of markets and consumers has strengthened, and corporate social contributions have also increased. Over the past 10 years, the proportion of companies rated B+ or higher in ESG (Environmental, Social, and Governance) evaluations rose 2.3 times, from 13.8% (92 companies) in 2011 to 31.9% (246 companies) in 2022. Additionally, over the past 20 years, the dividend payout ratio of large corporations increased 3.8 times, from 17.8% to 68.5%. The total social contribution expenditure of domestic large corporations also grew 3.7 times, from KRW 706.1 billion in 2000 to KRW 2.6123 trillion in 2020.

However, although South Korea’s economic freedom has significantly increased compared to the past due to the spread of the free market economy, it ranks 26th among 38 OECD countries, which is still low compared to major advanced countries.

South Korea’s quality of life level also ranks 32nd among 38 countries. In particular, compared to the top 10 countries in economic freedom, South Korea is weak in community, environment, life satisfaction, health, work-life balance, and income. This is because economic freedom is linked to the quality of life of the people. An analysis of economic freedom and quality of life (BLI) among the top 10 and bottom 10 OECD countries out of 38 showed a clear positive correlation (correlation coefficient +0.80) between economic freedom and quality of life.

Choo Kwang-ho, head of the Economic Policy Office at KERI, said, “When a free market economy develops, active corporate activities promote economic growth and improve the quality of life of the people,” adding, “Since South Korea’s economic freedom is lower than that of OECD countries, it is necessary to increase private economic freedom through regulatory improvements, labor market reforms, and strengthening tax competitiveness.”

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