Raising our potential growth rate matters

Ahn Dong-hyun
The author is a professor of economics at Seoul National University.

The Korean economy received a rush of forecasts for this year’s outlook at the end of last year. None of them were that bright. The International Monetary Fund (IMF) and the Organisation for Economic Cooperation and Development (OECD) estimated Korea’s annualized growth rates at 2.2 percent and 2.3 percent, respectively, for 2024. The Bank of Korea and the Korea Development Institute (KDI), a state think tank, each forecast the figure to be 2.1 percent and 2.2 percent, respectively.

The projections look better than the estimated dismal growth rate of 1.3 percent to 1.4 percent for last year due to the double weaknesses in domestic and external demand, but the outlook cannot be comforting.

But should Korea be disappointed by the “around 2 percent” estimates? The annual growth rate takes structural compositions of the potential growth rate and cyclical factors into consideration. The potential growth rate refers to the maximum level at which an economy can expand based on labor, capital and other production factors without sparking inflationary pressure. When compared to a student, the figure can be translated into the best he or she can achieve academically. However, the student can end up doing better or worse than his or her academic ability, depending on individual and environmental conditions on the exam day.

Various methods are used to estimate a growth potential just like students’ academic performance is measured by mock tests. Because the results can differ based on the methodology, no country officially releases its potential growth rate. Instead, the IMF has put Korea’s potential growth rate for 2024 at 2.2. percent, while the OECD gave an even lower figure at 1.7 percent. The BOK estimates around 2 percent. Overall, Korea’s potential growth for this year falls around 2 percent.

It is better for us to worry about the weakening trend in our potential growth, not how much the economy can perform this year. Over the past two decades, the government, liberal or conservative, has striven to bolster our growth potential to little avail. According to the OECD, Korea’s potential growth rate peaked at 5.4 percent in 2001 to fall to 3.8 percent in 2011 and to 2.2 percent in 2021. In other words, the weakening pace has accelerated. Potential growth rates for most advanced economies stagnated from 2001 to 2011, but since then, they have maintained the status quo or taken an upward turn in some cases. The United States, for instance, saw its growth potential rise from 1.5 percent in 2011 to 1.8 percent in 2021. Canada, France, and Italy also showed improvements.

To hoist up the growth rate to a satisfying level, we need to raise growth potential. But that cannot be achieved through short-term stimuli measures. All things that fall have wings, but flapping with dysfunctional wings cannot prevent a fall. The Korean economy needs a rocket engine as powerful as the one that powered Sputnik 1 — the first artificial satellite the Soviets successfully put into the Earth’s orbit in 1957 — to beat gravity, which is pulling down its growth potential.

Strengthening growth potential requires a long-term policy. But it cannot be expected from the country, as its policy is often embedded with ideological design and morphed into a monster due to ferocious political wrangling during the legislative review. The output is short-lived, depending on the ruling power that changes every five years. Unless there is structural protection of the economy from political influence or a major paradigm shift, the economy can slowly die like the frog in the pot. Politics are mired in a deadlock until this very moment, even though time is definitely not on our side. Aren’t we wasting our time just like Didi and Gogo, who were waiting for the Godot who never arrived?

Translation by the Korea JoongAng Daily staff.