Failure to address structural issues lowers Korea’s potential growth rate

A general view of Lotte Tower (center front) and Namsan Tower (center back) amid Seoul city skyline and the Han River at sunset in 2018. Before the outbreak of the pandemic in Korea. South early last year, there were warnings that a decline in labor productivity, a shrinking working-age population and other negative factors would continue to reduce the country’s growth potential in the future. ‘to come up. afp

Failure to address structural issues lowers Korea’s potential growth rate

A report released by the Bank of Korea last week estimated the country’s potential growth rate for 2021-2022 at 2 percent, down 0.2 percentage point from its previous estimate made in August 2019. The rate for 2019-20 was estimated at 2.2%. , also a decrease from the previous projection of 2.5 to 2.6 percent.

The fall in South Korea’s potential growth rate has been accelerated in recent years not only by the economic fallout from the Covid-19 pandemic but by structural problems weighing on Asia’s fourth-largest economy. The potential growth rate refers to the maximum possible rate at which an economy can grow without triggering inflation.

The International Monetary Fund (IMF) remains more cautious about Korea’s economic fundamentals, estimating its potential growth rate for 2020-22 at 1.8%.

Before the outbreak of the pandemic here early last year, warnings were issued that declining labor productivity, shrinking working-age population and other negative factors would continue to reduce the potential. growth of the country in the future.

Local research institutes predict that unless these issues are addressed effectively and urgently, Korea’s potential growth rate could fall below 1% by 2030.

The downward trend in potential growth cannot and should not be minimized, as the indicator points to the overall health of an economy and serves as a barometer of a country’s future growth.

It is somewhat inevitable for mature economies to see their potential growth rate decelerate. But Korea, which is on the verge of crossing the threshold and becoming one of the world’s advanced economies, could further boost its economic growth.

Government officials expect Korea’s economy to accelerate amid a global economic recovery and register a growth rate of more than 4% this year, following a 1% contraction last year under the influence of the pandemic.

But without a serious overhaul of its economic fundamentals, the country will remain in a rut of low growth over the long term. In a context of sluggish growth, youth unemployment will worsen and tax revenues will decline. With weakening economic fundamentals, interest rate hikes aimed at correcting financial imbalances could have a more negative impact on consumption and investment.

The administration of President Moon Jae-in has delayed or abandoned the structural reforms necessary to consolidate the long-term strength of the economy. On the contrary, the displaced policies she has pursued since Moon came to power in 2017 have undermined Korea’s growth potential.

The revenue-driven growth of the Moon administration, which places greater burdens on employers, has pushed many workers out of work.

Its pro-labor measures have made the labor market more rigid and hampered efforts to improve the country’s labor productivity, which remains near the bottom among member states of the Organization for Economic Co-operation and Development.

The Moon administration also introduced more regulations, discouraging companies from increasing investment and hiring more workers.

It should be noted that the impact of the pandemic on a country’s potential growth rate differs depending on the policy response of its government.

The Moon administration should redouble its efforts to accelerate regulatory and labor reforms to revitalize business activity, nurture new engines of growth and attract more women and young people to the labor market .

It may be too much to expect him to revisit the economic framework before Moon leaves office in May. But at the very least, it’s the administration’s obligation to remove the restrictions it has added in recent years.

Worryingly, presidential candidates from ruling and opposition parties show little interest in bolstering the country’s declining growth potential. Most of them are concerned with coming up with populist spending plans. But whoever succeeds Moon will struggle to fund his welfare promises without increasing tax revenues through continued economic growth.

Korea’s economy has struggled to grow ever since its gross national income per capita hit the $ 30,000 level. Now is not the time to let the economy contract while neglecting efforts to strengthen its growth potential.


About Emilie Brandow


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