South Korea’s potential growth rate has declined for decades, reflecting the nation’s aging society, slowing capital accumulation and changing job market, a think tank report showed on August 18.
Asia’s fourth-largest economy’s potential growth rate – gross domestic product (GDP) per capita aged 15 and over – by decade came to an average 2.1 per cent in the 2010s, compared with 7.6 per cent in the 1980s, according to the Korea Economic Research Institute (Keri). The figure has been gradually falling, with 5.3 per cent in the 1990s and 3.8 per cent in the 2000s.
A potential growth is the rate of economic expansion a country can sustain over the medium term without excess inflation. It has overall declined in advanced economies in recent decades.
The think tank took total factor productivity, capital accumulation, labour hours and employment per decade into account when calculating the growth rates. As a result, all areas expect employment rate have been declining in recent decades.
Total factor productivity (TFT) – a measure of productive efficiency by measuring the size of output from “unseen” inputs including labour, capital and regulations – fell to 2.9 per cent in the 2010s from 6.4 per cent in the 1980s. The figure stood at 4.2 per cent in the 1990s and 4.1 per cent in the 2000s.
Capital accumulation reached its peak at 2.1 per cent in the 1990s from 0.7 per cent in the 1980s, then sharply fell to 0.3 per cent in the 2000s. It stood flat at zero per cent in the 2010s.
Average labour hours came to minus 1.2 per cent in the 2010s, compared with 0.1 per cent in the 1980s. It stood at 0.8 per cent and 0.9 per cent in the 1990s and 2000s, respectively.
Meanwhile, the employment rate has steadily hovered around 0.4 per cent in the cited decades, Keri said.
The think tank voiced concerns that the slowing pace of the potential growth could eventually pull the economy down into negative growth, if the issues remain unresolved. The changing labour market affected by the nation’s declining birthrate and the aging population trend is likely to further drag down the growth potential, it added.
The nation has been slowly morphing into an aged society. The number of senior citizens, or people aged 65 and older, came to 8.21 million as of November, data from Statistics Korea showed, accounting for 16.4 per cent of the total population. The economy is projected to become a super-aged society in 2025, when those aged 65 and older account for 20 per cent of the population.
The total fertility rate – the average number of children a woman bears in her lifetime – hit a new record low of 0.84 last year, the same data showed. It marked the third straight year that the rate was below one per cent.
Overall, South Korea’s total population grew slightly in the cited period, as more Koreans living overseas returned home due to the global Covid-19 pandemic. A total of 51.83 million people lived in South Korea as of November 1, up 0.1 per cent or 50,000 year-on-year.
“Since there is a limit to supply in labour and capital, Korea must boost its total factor productivity to nurture its growth potential,” said Choo Kwang-ho, the head of Keri‘s economy policy division.
“In order to achieve that, an overhaul of the strict business regulations, tax benefits and support for more research and development must be implemented,” Choo added.
THE KOREA HERALD/ASIA NEWS NETWORK