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Failure to address structural problems drags down Korea’s potential growth rate

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A general view of the Lotte tower (front centre) and Namsan tower (rear centre) amid the Seoul city skyline and Han river during sunset in 2018. Before the outbreak of the pandemic in South Korea early last year, there were warnings that a decline in labour productivity, a shrinking working-age population and other negative factors would continue to reduce the country’s growth potential down the road. AFP

Failure to address structural problems drags down Korea’s potential growth rate

A report released by the Bank of Korea last week estimated the country’s potential growth rate for 2021-22 at two per cent, down 0.2 percentage point from its previous estimate made in August 2019. The rate for 2019-20 was estimated at 2.2 per cent, also a fall from the previous projection of 2.5-2.6 per cent.

The fall in South Korea’s potential growth rate has been accelerated in recent years not just 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 on Korea’s economic fundamentals, estimating its potential growth rate for 2020-22 at 1.8 per cent.

Before the outbreak of the pandemic here early last year, there were warnings that a decline in labour productivity, a shrinking working-age population and other negative factors would continue to reduce the country’s growth potential down the road.

Local research institutes predict that unless such problems are addressed in an effective and urgent manner, Korea’s potential growth rate could fall below one per cent by 2030.

The downward trend in potential growth cannot and should not be downplayed, because the indicator points to the comprehensive 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 rates decelerating. But Korea, which is about to cross the threshold and become one of the world’s advanced economies, could still boost its economic growth.

Government officials expect Korea’s economy to gather steam amid a global economic recovery and record a growth rate of more than four per cent this year, following a one per cent contraction last year under the influence of the pandemic.

But without a serious overhaul of its economic fundamentals, the country will be stuck in a low-growth rut in the long run. Amid the sluggish growth, youth unemployment will worsen and tax revenues will decrease. With economic fundamentals weakening, interest rate hikes intended to redress financial imbalances could have a more negative impact on consumption and investment.

President Moon Jae-in’s administration has delayed or abandoned structural reforms needed to shore up the long-term strength of the economy. Rather, misplaced policies it has pursued since Moon took office in 2017 have undermined Korea’s growth potential.

The Moon administration’s income-led growth drive, which imposes heavier burdens on employers, has pushed many workers out of jobs.

Its labour-friendly measures have made the job market more rigid and hampered efforts to improve the country’s labour productivity, which remains near the bottom among member states of the Organisation for Economic Cooperation and Development.

The Moon administration has 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 its government’s policy response.

The Moon administration should step up efforts to accelerate regulatory and labour reforms to help reinvigorate corporate activity, nurture new growth engines, and draw more women and young people into the workforce.

It may be too much to expect it to overhaul the economic framework before Moon leaves office in May. But at the very least, it is the administration’s obligation to do away with the restrictions it has added over the past few years.

What is worrying is that presidential contenders from both ruling and opposition parties show little interest in bolstering the country’s sagging growth potential. Most of them are preoccupied with putting forward populist spending plans. But whoever succeeds Moon will find it difficult to finance their welfare pledges without increasing tax revenues through continuous economic growth.

Korea’s economy has been struggling to move forward since its per capita gross national income touched the $30,000 level. It is no time to let the economy contract by neglecting efforts to bolster its growth potential.

EDITORIAL / THE KOREA HEARALD/ASIA NEWS NETWORK

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