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KDI Economic Outlook 2019-1st Half
Post-crisis Slowdown in the Korean Economy and Long-term Outlook

May 22, 2019

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KDI Report VOD
Korea’s economic growth rate dropped to a yearly average of 3% in the 2010s, raising concerns over growth potential.

The economic growth rate is an indicator for the growth in the sum of all products and services that are produced by a country.

As total output is determined by labor, capital input and productivity, we are able to see the contribution rate of each factor to economic growth.

Accordingly, KDI conducted an analysis of the contribution of production factors to the decline in economic growth.

It was found that there were no meaningful changes in labor input while a slowdown was seen in physical capital and total factor productivity or TFP.

Declines were also evident in these two factors in the per capita economic growth rate, implying that the value-added created by and the labor productivity of an individual has also dropped.

The decline in physical capital contribution is often seen when an economy reaches maturity.

In Korea, this means that the downtrend in TFP growth was the major driver of the fall in growth, and not that investments have stagnated.

Then, why is productivity growth falling?

Improvements in the determinants of total factor productivity i.e systems, efficient resource allocation, education and human capital among others may have slowed.

On the other hand, the fall in external demand resulting from the slow growth in international trade following the global financial crisis may have been a contributing factor.

In fact, since the financial crisis, Korea’s goods export has declined and the growth in labor productivity, especially manufacturing, has deteriorated significantly.

The IMF concluded that the fall in growth suffered by the majority of countries following the global financial crisis propelled the fall in growth potential. It also expects that it will take a considerable amount of time to return to pre-crisis levels.

Due to such conditions in the world economy, it is hard to expect that Korea’s labor productivity will swiftly respond to a recovery in external demand.

Based on the analysis, it is expected that Korea’s growth rate in 2020 will mark a high 1% if conditions remain the same, and a low-to-mid 2% if there is an uptick in productivity on continued innovation.

The economic growth rate per capita is also expected to stand between a high 1% to a low-to-mid 2%.

(Interview with the Author)
The growth of Korea’s economy is expected to decelerate even further in 2020 considering the population aging factor. Responding to the falling growth trend with active fiscal policies could be effective in the short-term, but a recurrence will place a strain on government finance. If efforts were concentrated on enhancing productivity, the decline in the growth rate could be eased in the long-term. From a institutional or resource-allocation perspective, Korea still has sufficient room to improve productivity.
■ The Korean economy grew at an annual average rate of 3% in 2011-2018, which appears to be a downward trend and not a temporary setback.

■ A prolonged growth accounting reveals that the Korean economy will likely grow to a low-to-mid 2% (annual average) in the 2020s when productivity is expected to improve through continued innovation.

■ Thus, the government should make concerted policy efforts to improve productivity and to keep a close eye on the causes of the slow economic growth.
 
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Office of Global Economy
Providing Economic Forecast and Macroeconomic Policy Direction, the Groundwork for a Brighter Future

The Department of Macroeconomics is conducting researches on the macro economy and macroeconomic policy, particularly focusing on suggesting the analysis of macroeconomic trends and current status of the economy at home and abroad, the economic forecast, and the policy direction of the macro economy. The Department is also in charge of establishing, sustaining and maintaining various econometric models, based on which it analyses policy effects and develops a long-term economic forecast.

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