Press Release Potential Growth Rate of the Korean Economy for 2003-2012 February 18, 2003
Potential Growth Rate of the Korean Economy for 2003-2012
February 18, 2003Chinhee Hahn, Kyungsoo Choi, Dongseok Kim, Kyung-Mook Lim
1. Purpose of Study
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The purpose of this study is 1) to analyze the trend of potential growth rate of the Korean economy during the period from 1981-2000, 2) then to make projections on the future potential growth rate for the 2003-2012 period. |
- Also, the intention of this study is to present crucial policy directions to enhance the potential growth rate through identifying factors that will influence the future economy.
2. The Past Trends of Potential Growth Rate: 1981-2000
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Potential GDP is defined as the long-term sustainable level of GDP which can be achieved by utilizing current technology. |
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The study revealed that the potential growth rate of the Korean economy was at a 7.8 percent level during the 1980s however, it maintained a steady decreasing trend which resulted to a 6.6 percent level during the first half of 1990s, and then further down to 6.0 percent level during the second half of 1990s.1) |
- The contribution of labor, human, and physical capital combined on the potential growth rate during the 1980s recorded 78 percent and 84 percent in the 1990s, proving the argument that the past Korean economic growth was largely production input-oriented.
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The decrease in potential growth rate from the 1980s to the first half of 1990s was mainly led by the slowdown of total factor productivity and labor input. The decrease during the second half of 1990s was caused mainly by the decline in the growth rate of physical capital. |
- The contribution of the number of employed persons to the potential growth
rate was 1.7 percentage point during the 1980s but it decreased steadily to 1.3
percentage point during the first half and further down to 1.0 percentage point
during the second half of 1990s.
- The contribution of human capital to the potential growth rate per worker
maintained at 0.8 - 0.9 percentage point.
- The contribution of physical capital was at 3.6 percentage point during the
1980s and it increased to 4.0 percentage point during the first half of 1990s.
However, it dropped significantly to 2.4 percentage point during the second half
of 1990s, reflecting the severe decrease in investment after the financial
crisis.
- The contribution of the total factor productivity to the potential growth rate was at 1.7 percentage point during the 1980s, which fell sharply to 0.4 percentage point during the first half, then rose to 1.7 percentage point during the second half of the 1990s, thus holding back the growth rate due to the slowdown in the physical capital accumulation.
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1981~1990 |
1991~2000 | ||||
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81-85 |
86-90 |
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91-95 |
96-00 |
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Real GDP Growth Rate |
8.3 |
7.5 |
9.1 |
6.0 |
7.2 |
4.8 |
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Potential GDP Growth Rate |
7.8 |
7.7 |
7.9 |
6.3 |
6.6 |
6.0 |
|
No. Employed |
1.7 |
1.7 |
1.7 |
1.2 |
1.3 |
1.0 |
|
Human Capital |
0.8 |
0.8 |
0.8 |
0.9 |
0.9 |
0.9 |
|
Physical Capital |
3.6 |
3.4 |
3.8 |
3.2 |
4.0 |
2.4 |
|
Total Factor Productivity |
1.7 |
1.8 |
1.6 |
1.0 |
0.4 |
1.7 |
Notes 1) Contribution to potential GDP growth rate by potential factor input and Total Factor Productivity.
* The increase in physical capital and the decrease in total factor productivity during the first half of 1990s constitute the proof of excessive investment prior to the Financial Crisis, while the decrease in the increase rate of physical capital and the rise of Total Factor Productivity during the second half of 1990s suggests that there are changes in the growth pattern.
3. Prospect for the Future Potential Growth Rate: 2003-2012
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The potential growth rate of the Korean economy in the future will be mainly determined by the rate of increase in its total factor productivity, which is dependent on the quality improvement in the economic systems through structural reforms and continued external liberalization of the economy. |
- Analyses of 62 financial crisis cases of 48 countries revealed that a
country with a past history of high (or low) growth pattern prior to its
economic crisis does not necessarily resume its high (or low) growth pattern
after the crisis, and that changes in their growth patterns were heavily
dependent on the growth rate of its total factor productivity.
- Recent academic research indicates that the total factor productivity is mainly dependent on the improvement of "social infrastructure," which can be best represented by the institutional quality and openness.
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If structural reforms for system improvement and external liberalization are continuously pursued, the potential growth rate of the Korean economy is expected to be approximately 5.4% during the 2003-2007 period however, slightly decrease to 5.1% during the 2008-2012 period. |
- Despite a faster growth rate of total factor productivity compared to the
second half of 1990s, the reason for the decrease in the potential growth rate
during the period 2003-2007 is mainly due to a slowdown in the growth rate of
inputs such as physical capital and employment.
- Further slowdown in potential growth rate during the 2008-2012 period can be
attributed mostly to the slowdown in employment growth, which reflects low
population growth and ageing.
- The potential GDP growth rate per employed person is expected to be around
4.6% for the next 10 years, maintaining the level which was predominate during
the second half of 1990s (4.7%).
* Also, with respect to the sources of economic growth, the Korean economy is expected to show a transition from the past input-oriented growth to a productivity-led growth.
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Period |
Potential Growth Rate |
Degree of Contribution | |||
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No. Employed |
Human Capital |
Physical Capital |
Total Factor Productivity | ||
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1991-1995 |
6.8 |
1.3 |
0.6 |
4.0 |
0.8 |
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1996-2000 |
5.7 |
1.0 |
0.6 |
2.4 |
1.6 |
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The case of improvement of institutional quality and openness | |||||
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2003-2007 |
5.4 |
0.8 |
0.7 |
2.0 |
2.0 |
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2008-2012 |
5.1 |
0.5 |
0.6 |
2.0 |
2.0 |
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2003-2012 |
5.2 |
0.6 |
0.6 |
2.0 |
2.0 |
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The case of current level of institutional quality and openness | |||||
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2003-2007 |
4.8 |
0.8 |
0.7 |
1.9 |
1.5 |
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2008-2012 |
4.5 |
0.5 |
0.6 |
1.9 |
1.5 |
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2003-2012 |
4.6 |
0.6 |
0.6 |
1.9 |
1.5 |
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However, when Korea fails to pursue continuous structural reforms for "social infrastructure," its potential growth rate may fall below 5 percent in the future. |
- If the total factor productivity is maintained at 1.5 percent level just like the latter half of 1990s for the next 10 years, the potential growth rate is expected to be about 4.8 percent during 2003-2007 and it would fall further to 4.5 percent level during 2008-2012.
4. Policy Directions to Increase the Potential Growth Rate
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The potential growth rate of the Korean economy is not given but will be affected by the efforts to improve institutional quality and openness. |
- That is, the potential growth rate will critically depend on the incentive system that the society provides to the productive activity.
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Better institution and greater openness strengthen the incentive to the productive activity and contribute to the improvement in the total factor productivity and, hence, overall growth performance. |
- Establishing the rule of law, protecting contractual and property rights, eradicating corruption, and liberalizing trade and investment in a globalizing world are among the highly recommend policy agenda in order to boost the growth potential of the Korean economy.
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