Time for structural reform

Falling growth potential weighs down on economy

One of the more serious risks for the lackluster Korean economy is the continuing fall in its growth potential. This risk has already eroded economic vitality and is threatening sustainable growth. Without taking comprehensive measures, the country will not be able to avoid any looming economic woes.

A report released Monday by the Bank of Korea (BOK) predicts the country’s growth potential will shrink further and faster than previously anticipated. The central bank estimated the growth potential for 2016-2020 at between 2.7 percent and 2.8 percent, down from its earlier projection of 2.8 percent to 2.9 percent.

The BOK also put the figures for 2019 and 2020 much lower at 2.5 percent to 2.6 percent. The problem is that Asia’s fourth-largest economy cannot even live up to its growth potential.

In July, the central bank revised down its growth outlook for this year to 2.2 percent from its April figure of 2.5 percent. This shows the economy is underperforming with regard to what it could achieve.

There are different factors negatively affecting the growth potential. Two of these are the low birthrate and the aging population which is causing a drop in the working-age population number. Other elements are uncertainties arising from rapid external changes including the U.S.-China trade war and Japan’s export restrictions on South Korean companies.

In fact, the economic conditions both at home and abroad are deteriorating. Some economists warn that the economic growth rate may fall below 2 percent this year. They even warn that the country has already entered a phase of a long-term economic slump. It is, in this regard, hard to ignore the risks of recession or deflation.

Growth potential is a measure of an economy’s capacity to achieve growth — without causing inflation — by utilizing all the elements of production, namely labor, capital and technology. Korea’s growth potential stood at 7 percent to 8 percent in the 1990s. But it plummeted to the 5 percent to 5.2 percent range in the first half of the 2000s and 3 percent to 3.4 percent in the latter half of the decade. If the declining trend continues, the figure could hit the 1 percent level as early as 2026. This explains why the country should do everything it can to reverse this situation.

Needless to say, the loss of economic vitality leads to a dearth in jobs and a decline in capital spending. It could dent the country’s growth potential, creating a vicious cycle of sluggish production, consumption and investment. It may eventually weaken industrial competitiveness and cause economic collapse.

The only way to prevent such devastating consequences is to push for structural reform aimed at overcoming the chronic weakness of our economy and replenishing its growth potential. Labor market reform is also crucial to boosting productivity.

The Moon Jae-in administration should no longer stick to its ill-conceived “income-led growth” policy. Instead, it must make all-out efforts to promote deregulation, innovation and entrepreneurship. It should not waste any more time and effort, but should focus on reviving the economy and making people better off.