The Korean Economic Forum
Resuming the Take-Off of the Korean Economy by Productivity Renovation
Hak K. Pyo (Seoul National University), Hyunbae Chun (Sogang University) and Keun Hee Rhee (Korea Labor Institute)Year 2017Vol. 10No. 1
The recent slow-down of the Korean economy takes the form of long-termstructural trend of stagnation rather than temporary and cyclical recession. Thepurpose of the present paper is to decompose and analyze the various sources ofgrowth in the Korean economy by the growth accounting method and assess thestructural productivity trend by estimating labor productivity and total factorproductivity (TFP). During the period (2009-2016) after the global financialcrisis in 2008, both the economy-wide and the manufacturing sector of theKorean economy has experienced a rapid real wage growth exceeding laborproductivity growth. The growth in value-added (income) was taken away bylabor income rather than by capital and TFP contribution. As a consequence,the Korean economy could not avoid the stagnant investment-growth trap duringthe period. Throughout the entire period (1996-2014) of our growth accountinganalysis, the growth rate of real value-added (4.31 %) was decomposed by thegrowth rates of labor input (0.64 %), capital input (3.01 %) and TFP (0.66%). The growth rate of TFP in Korea was slightly bigger than other advancedcountries but its relative share of contribution to value-added growth was lower.The structure of the economic growth in Korea was basically input-led growthrather than productivity-led growth. We have also indirectly estimated thepotential GDP growth rate of the Korean economy during the period of2011-2014 as 3.81 percent compared to actual rate of real GDP growth (2.95 %)by postulating 0 percent growth of labor input rather than realized actual growthrate of real labor input (-0.83 %) under the assumption that during the periodthe Korean economy could have improved low fertility and ageing issues andyouth unemployment problem. There are several reports arguing that Korea’spotential GDP growth rate has been reduced to around 2-3 percent range butour estimate implies there was a significant level of potential-real GDP growthgap (0.86 % point). This gap reflects why the economy’s private sector has felta deeper recession gap in the recent past. The Korean economy needs to avoidpopulism-based employment-biased macroeconomic policy and to move on toenhancing its human capital and maintain a positive rate of effective labor inputgrowth and to aim at a sustainable productivity-led medium-growth path throughtechnology innovation and system renovation.