KDI foresees GDP growth shrinking to 1.7%

A state-own think tank predicted a gloomy future in which the Korean economy sees average growth of 1.7 percent in the 2020s unless structural changes are made.

It added that while aggressive government spending could be a help, in the long term, it is not a growth solution.

The Korea Development Institute (KDI) on Friday released a report that showed Korea’s economic growth between 2011 and 2018 averaging 3 percent.

This is less than half the 7 percent growth averaged between 1991 and 2000 and slower than the 4 percent growth averaged between 2001 and 2010.

The report noted that although the economy expanded 6.5 percent in 2010, such robust growth is not expected again.

The KDI noted that Korea’s biggest problem is its falling productivity.

Real value-added productivity per employee in the 1990s grew at an average yearly rate of 5.2 percent. This fell to 3.1 percent in the 2000s. Since 2011, average yearly growth has been 1.6 percent.

Korea’s total factor productivity, which refers to inputs like technologies, resources and regulations while excluding labor and capital, has also fallen.

The contribution of the total factor productivity to GDP in the 1990s was 2 percentage points. This fell to 1.6 percentage points in the 1990s and, in recent years, further retreated to 0.7 percentage points.

The KDI warned that if total factor productivity remains the same, Korea’s economy could face its average economic growth in the 1 percent range.

The contribution to GDP made by employment, on the other hand, hasn’t changed much. Between 2011 and 2018, its contribution was 0.8 percentage points, the same as in the 2000s.

The reason the contribution of employment to GDP hasn’t changed dramatically compared to 2000s is that, despite the aging of the population, there are more categories of people like women and the elderly working.

The KDI said that if Korea improves its productivity - especially focusing on non-labor and capital factors - its economy’s average growth in the 2020s could move up to 2.4 percent.

“We have a lot of room for improvement in productivity through changes in regulations from property protection, finance, labor and corporate activities,” said Kwon Kyu-ho, a KDI economist.

“If we raise the total factor productivity’s contribution to economic growth to 1.2 percentage points, we will be able to maintain mid-2 percent growth,” Kwon added.

He said when raising the contribution of total factor productivity, physical capital will also improve, which will help in achieving strong economic growth.

However, Kwon warned about relying too much on government spending.

“In a situation in which economic growth is slowing, confusing cyclical and structural problems poses a huge risk,” Kwon said.

“If the problem is cyclical, aggressive government spending could help. If it’s a structural problem, an expansionary fiscal policy will only increase the burden on government finances in the long term.”

On Thursday during a government finance strategy meeting held in Sejong, President Moon Jae-in ordered the government to aggressively spend in order to boost the economy.

While this year’s budget is at an all-time record of 469 trillion won, the government has requested a 6.7 trillion won supplementary budget.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]