KOREA

Korea Herald-Feb 20

Feasible way to build growth potential is to raise productivity

The International Monetary Fund has forecast South Korea’s potential growth rate to dip below 2 percent in the 2030s.

The potential growth rate is a growth rate realizable without incurring inflation by putting all its capital, labor and technology in an economy. It shows the fundamental health of an economy.

This is not the first warning. Last year, the Bank of Korea estimated that the nation’s potential growth rate for the five-year period from 2016 to 2020 would be about half what it was 15 years ago. Repeated warnings indicate the situation is serious.

The problem is that the IMF attributed the decelerating growth to structural factors inherent in the national economy. As major causes of the expected dip in growth potential it cited the decreasing working age population, remarkably low productivity compared to developed economies and a rigid labor market.

In the past half-century, the population of South Korea has expanded from 28 million to 51 million, propping up fast growth through increases in labor input and domestic demand.

But the annual number of births shrank sharply from more than 630,000 in 2000 to about 355,000 last year. Working age population also began to decline last year.

To make matters worse, it is getting difficult to increase capital input as sharply as before as economic growth nears maturity.

There are obvious limits to quantitative expansion of both labor and capital. In the final analysis, a feasible way to build up growth potential is to improve productivity.

The IMF noted that South Korea should speed up regulation and labor reforms to raise its productivity, which is about 50 percent of that of the US.

To raise productivity, it is urgent to lessen rigidity in the labor market, revamp regulations toward spurring investments in innovation and improve education systems to produce more creative talents. Along with these actions, the government must heed the IMF recommendation for active measures to increase labor supply.

If South Korea reforms regulations to the level of advanced economies, its potential growth rate should rise 0.3 percentage point, and then if it reforms its labor market, the rate would rise further by 0.3 percentage point, according to IMF estimates.

The IMF advised Seoul to try to ensure flexibility and stability in the labor market. Such recommendations have been heard again and again, but rarely is anything done about them. The advice means the government must shift the focus of its labor policy from the protection of vested labor interests to flexible employment.

Rising unemployment is another serious problem.

According to the Organization for Economic Cooperation and Development, the unemployment rate of South Korea rose four successive years to 3.73 percent last year. In contrast, most other OECD member countries saw their unemployment rates surge after the 2008 financial crisis then fall back to pre-crisis levels.

The youth unemployment rate is particularly worrisome. It stood at 10.3 percent last year. It was the fourth straight year to mark a double-digit rate. This is largely due to stagnant business in the service industry, which hires many young people.

It is noteworthy that the IMF cautioned against sharp hikes in the minimum wage for next year and beyond, saying it could worsen youth unemployment.

It is a warning of the side effects getting out of control if the government carries out the policy to raise the hourly minimum wage to 10,000 won ($9.30) by 2020. The government must heed this warning and review the effects of the minimum wage sufficiently before raising it further.

Potential growth rate is more important as an indicator of the rock bottom health of an economy than short-term growth rate, which can fluctuate depending on business cycle.

If the Korean economy gets stuck in a low growth rut, it will be difficult to create jobs and increase incomes. The administration must prioritize restoring the potential gr, Bowth rate in its economic policies. The National Assembly as well as economic policymakers must listen intently to IMF warnings. There is little time to act.

(First published in Korea Herald – http://www.koreaherald.com/view.php?ud=20180220000549)