KDI Economic Outlook 2022-2nd Half Long-term Economic Growth: Projection and Implications November 08, 2022
KDI Economic Outlook 2022-2nd Half
Long-term Economic Growth: Projection and Implications
#Economic Trends and Outlook
#Issue Analysis
November 08, 2022
-
Jiyeon Kim
profile
-
Kyu-Chul Jung
profile
-
KDIHUR, Jinwook
- Summary
-
■ According to the analysis, the declining growth rate of the Korean economy since the global financial crisis was mainly attributable to the slowdown in productivity improvement.
- During 2001~10, the slowdown in capital supply growth was the main driver of falling economic growth.
- In comparison, the contribution of labor supply to growth remained relatively steady in 1991~2019.
■ It is projected that the economic growth rate of Korea will slump to 0.5% in 2050 as the growth starts to slow gradually from the 2020s due to demographic changes like population decline and rapid population aging.
- In 2050, the per capita GDP growth rate is expected to stand at 1.3% due to the accelerating pace of population aging, which causes decreasing working-age population and an increasing share of the elderly with low labor force participation.
- This long-term growth projection is based on the premise that Korea’s productivity will maintain a 1% growth after a partial rebound from its lowest (0.7%) in 2011~19.
- Meanwhile, the potential growth rate of the Korean economy will reach a 2.0% level over the next five years (2023~27).
■ The Korean economy needs to mitigate the negative impacts of demographic changes by actively pushing for structural reforms to enhance productivity.
- Institutional reforms in trade openness and regulatory rationalization aiming to boost Korea’s economic vibrancy are necessary to achieve higher productivity.
- Employment conditions should improve to facilitate the active participation of women who, despite high productivity, typically stay out of the labor force due to childbirth and rearing, as well as elderly citizens whose share is rapidly increasing. Also, a reduction in labor supply needs to be countered by actively accepting foreign workers.
- At the same time, continued policy efforts are needed, with a particular focus on improving the qualitative capability of human capital through educational reforms.
■ Furthermore, the stance of macroeconomic policy needs to reflect the slowing pace of the long-term economic growth.
- While efforts to strengthen the growth potential are of reasonable necessity, the government should not be myopic and focus only on short-term stimulus in seeking a goal that greatly exceeds its growth potential.
This video provides English subtitles. Click on the video to watch more conveniently.
- | Related information |
-
Our economic growth rate continues to decline, and the aging population is rapidly progressing...
What will happen to our economy in the future? We estimated labor and capital supplies and divided them into three scenarios to analyze our economic growth rate in 2050.
[Related Reports]
Long-term Economic Growth: Projection and Implications
- Author: Jung, Kyu-Chul, Senior Fellow at KDI
- Interview with the author 2:40
#Economic Outlook #Economic Growth Rate #Aging #Inflation #FutureEconomy #2050
- | Script |
-
The Korean economy is slowing.
To understand why, we analyzed GDP in relation to the factors of production: labor, capital, and productivity. This analysis focuses on each factor's impact on economic growth.
The analysis shows that the growth rate declined in the 2000s due to a slowdown in the capital supply growth, and it also decreased as the productivity growth slowed after the global financial crisis.
On the contrary, the labor supply has remained relatively constant.
Statistics Korea projects that the working-age population will decrease rapidly and the elderly population will increase rapidly, reducing the working-age population to about half of the total population by 2050.
As our population ages and our economy matures, it'll be tougher to achieve the same high levels of growth as before.
What does the future hold for our economy?
To predict long-term economic growth until 2050, we estimated labor and capital supply using Statistics Korea's population projections.
Then, we established three scenarios for total factor productivity that changes depending on the extent of overall economic efficiency improvements.
In the baseline scenario, we assumed a total factor productivity growth rate of 1%, taking into account Korea's per capita GDP ranking in the bottom 32% of the OECD and the general trend that countries with lower income tend to experience higher rates of productivity growth.
The optimistic scenario assumes Korea's per capita GDP at 1.3% of the OECD's top 25%, while the pessimistic scenario predicts no rebound from 0.7% during the 2010s, when productivity was at its lowest.
Here’s the result.
The baseline scenario projects Korea's long-term economic growth rate to decline from just above 2% in 2023 to 0.5% by 2050, primarily due to a decrease in labor supply. The aging population and an increasing number of economically active elderly individuals are expected to contribute to the decline in per capita GDP, which is projected to be 1.3%.
Under the optimistic scenario, if the total factor productivity remains at 1.3%, the economy is expected to grow by about 1% in 2050, with per capita GDP growth in the low 1% range.
Under the pessimistic scenario, the economy is projected to experience 0% growth, with per capita GDP growth at less than 1%.
The analysis results indicate that improving total factor productivity is crucial to alleviate the impact of the declining labor supply due to aging.
[Interview]
Kyu-Chul Jung, Director of Office of Macroeconomic Analysis and Forecasting, KDI
To enhance the Korean economy's growth potential, we need to promote structural reforms that improve overall efficiency by strengthening the private sector's flexibility to adapt to various environmental changes. Opening up to the global economy can incentivize domestic firms to enhance productivity and competitiveness. Lowering entry barriers for startups can spur productivity improvements often referred to as creative destruction. True, efforts to strengthen growth potential through structural reforms are necessary, but we should avoid setting overly ambitious goals with short-term stimulus measures.
If you want to know more in detail?
related materials ( 9 )
- Key related materials
Security code
![captcha]()
We reject unauthorized collection of email addresses posted on our website by using email address collecting programs or other technical devices. To access the email address, please type in the characters exactly as they appear in the box below.
KDI Staff Information
Please enter the security code to prevent unauthorized information collection.
KDI Staff Information
KDI Staff Information