[Inside Chodong] Korea Faces 1% Potential Growth Rate Crisis... Must Follow the US, Not Japan

"Learning from Japan's Stagnation:
Korea Must Prioritize Innovation
and Openness to Boost Potential Growth"

"Facing a decline in potential growth rate, it is most important for Korea to take Japan as a cautionary example and not loosen the reins on innovation."

Recently, Aoshima Yaichi, a professor in the Commerce Department at Hitotsubashi University in Japan, gave this advice when asked what efforts Korea, facing the risk of a potential growth rate decline to the 1% range, needs to avoid following Japan's footsteps. Japan's potential growth rate began to decline sharply after the bubble burst in the 1990s and has remained in the 0% range until recently. Due to low birth rates and aging population causing a rapid decrease in the working-age population, coupled with Japan's long-term economic stagnation, companies have refrained from new investments and innovation activities, resulting in a continuous downward trend in potential growth rate. Although recent yen depreciation has improved corporate profitability and signs of revitalization have appeared in the Japanese economy, structural problems such as low birth rates, aging, and lack of innovation remain unresolved, and Japan still cannot escape the 0% potential growth rate.

The problem is that Korea is also heading down the same path as Japan. The Organisation for Economic Co-operation and Development (OECD) estimated Korea's potential growth rate for this year at 1.9% in June. Korea's potential growth rate, which has steadily declined over 12 years from 2013 to 2024, fell below 2% for the first time this year and is projected to drop to 1.7% next year. If this continues, a low-growth trend similar to Japan's could become entrenched. Particularly shocking is the fact that next year Korea's potential growth rate is expected to fall short of the United States' 1.9%, despite the U.S. having a much larger and more mature economy.

The reason for the rebound in the U.S. potential growth rate is high productivity. In a recent report, economic analysis firm Capital Economics projected that the U.S. potential growth rate could rise to 2.5% in the 2030s, with artificial intelligence (AI) potentially becoming a game changer. The report stated, "The biggest development that can definitely have a positive impact on productivity in advanced countries is AI technology," and added, "Investments related to AI will be strengthened, increasing capital intensity and thereby raising labor productivity." AI is expected to become a core driver of future innovation, accelerating not only productivity levels but also growth speed.

Corporate dynamism is also cited as a major factor boosting the U.S. potential growth rate. According to the Federal Reserve Bank of St. Louis database 'FRED,' the number of business startups, which was 300,000 in the fourth quarter of 2019 during the COVID-19 period, increased noticeably to 490,000 by the third quarter of 2020 and has maintained around 470,000 in the third quarter of this year. The post-pandemic startup boom, supported by institutional measures encouraging entrepreneurship, has breathed new life into innovation activities. There is also a perspective that the U.S. competitiveness lies in openness. Professor Aoshima pointed out, "The U.S. attracts talented individuals from all over the world," and emphasized, "Ultimately, securing openness is essential for innovation." The reason why Japanese companies, which have traditionally held conservative views on foreign workers, have recently started recruiting high-level talent especially in IT companies is also explained as an effort to support innovation activities.

When asked privately about solutions to the decline in potential growth rate, an economist sharply remarked, "Everyone knows that structural reforms and labor reforms are necessary, but because interests are entangled, no one takes action." For Korea's potential growth rate to follow the path of the U.S. rather than Japan, it is urgent to boldly eliminate unnecessary regulations that hold back companies and create an environment where ideas can lead to startups. The government must seriously consider ways to open the path to innovation by revitalizing the venture investment market and supporting free mergers and acquisitions (M&A) so that companies can regain dynamism.

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